India’s stock market faces significant risks from the U.S. administration’s proposed tariffs, which could reach a headline rate of 50% and average 36% after exemptions, according to Capital Economics in a recent note.
Since late June, both Indian equities and the rupee have weakened as U.S. President Donald Trump increased criticism of India’s trade practices.
While some sectors like textiles have already seen double-digit share price declines, their small weighting in the market, less than 2%, has so far limited the overall market reaction.
The larger pharmaceutical sector, which is heavily reliant on U.S. demand, has posted only modest declines, possibly due to expectations of exemptions or the low price sensitivity of its exports.
Analysts at Capital Economics noted that market movements so far appear small compared with the potential economic fallout, partly because investors may be betting that final tariff rates will be lower than announced. However, if these optimistic assumptions prove wrong, the downside could be sharp.
The brokerage estimates that sustained tariffs at current proposals could cut India’s GDP growth by around 1.5 percentage points over two years, reduce foreign direct investment appeal, and make earnings-per-share growth targets for MSCI India companies, already considered overly optimistic, harder to achieve.
Historical patterns show that even modest GDP slowdowns have often coincided with much steeper drops in corporate earnings growth.
High valuations add another layer of vulnerability. Despite recent declines, the MSCI India Index remains expensive by both absolute and historical standards.
While part of this reflects strong earnings growth expectations, political stability, and increased retail participation, it also stems from perceptions of India as a beneficiary of the U.S.-China trade tensions. That narrative could unravel if India becomes a direct and lasting target of trade restrictions.
Capital Economics says tariffs present a “big threat” to Indian equities, with scope for sharper declines if investor optimism fades.
While positive developments could trigger a limited relief rally, the brokerage still expects India’s stock market to underperform in the medium term amid weak earnings and elevated valuations, with stronger opportunities seen in the U.S., China, and Taiwan.
Source :
https://www.investing.com/news/stock-market-news/can-indias-stock-market-withstand-the-tariff-storm-4192328
