Moneycontrol Pro Panorama | Tariffs, talks and lengthening uncertainty

US President Donald Trump’s bouquet of tariffs has hit a bunch of trading partners already.

Dear Reader,

This newsletter is being typed on a laptop that runs on an Intel chip from the US, probably has parts shipped from Germany, Taiwan and is assembled in China. This, in a nutshell, is the global trade that entwines companies and consumers across national borders. But it is not as seamless as it seems.

Global trade has a cost and much of it manifests as tariffs depending on the size and bargaining heft of a country. It is needless to say that the US has the biggest bargaining chip in global trade compared to other advanced or emerging market nations. US President Donald Trump’s bouquet of tariffs has hit a bunch of trading partners already. For the rest, his reciprocal tariffs are coming. America will impose like-to-like tariffs on its trading partners, which is as bad as it gets for India.

Trump has called India a tariff abuser and a nation difficult to do business with. Prime Minister Narendra Modi didn’t waste any time to appeal to the good side of his friend Trump. After all, even during Trump’s first presidency, the rapport between the two leaders was visible to everyone. But the Modi-Trump bonhomie doesn’t seem to have resulted in any concessions for India, yet. Indeed, Trump was asked at the joint press meet of the two, post Modi’s visit to Washington, whether he would consider concessions for India. Trump quipped he didn’t get any in his first term. "We will be charging them whatever they are charging us. Whatever is India is charging, we are charging them. So it's called reciprocal and it's a very fair way,” Trump said. Analysts at Nomura point out that India’s tariffs, on a weighted average basis, were 9.5 percent for imports from the US while US tariffs on imports from India were 3.5 percent. The damage from reciprocal tariffs could be significant to us.

That does not mean PM Modi will come back empty handed. Trump and Modi agreed to increase India-US bilateral trade to $500 billion by 2030 and pledged cooperation in defence, artificial intelligence, and energy. On tariffs too, it is not immediate as reciprocal tariff imposition takes weeks and months to implement and the time until then is ripe for more negotiations. Venugopal Garre, head of India research at Bernstein, believes that potential negotiations will reduce the risk from tariffs. Read an exclusive interview of Garre by Vatsala Kamat here where he speaks on the economy, markets, and the outlook.

Bilateral cooperation in key sectors is not enough to comfort the markets, though. Tariffs can crimp demand for India's goods by making them expensive and we are particularly vulnerable in agriculture, chemicals, textiles, and transportation. The laptop on which this writer is working is about to have a very high replacement cost since reciprocal tariffs just drive prices up everywhere and may have exponential effects for some products.

But the threat of tariffs alone does not explain the meltdown Indian equity indices have been having this week. Equity investors are worried because of other equity investors elsewhere running for dollar cover. Ananya Roy explains in her column here that though initial tariffs have been imposed on steel and aluminium, metal stocks have not fallen much. “This indicates that the tariff itself is not the cause for concern. Instead, it is the general idea of unpredictable policies which is spooking markets.” Roy further writes, “As a country that runs on a trade deficit, as tariffs shake up the global trade balance, India is left particularly vulnerable to the indirect impact.”

No wonder the tariff threat blew off any relief that came from a good Budget and an easing monetary policy. In normal times, a policy rate cut would have fuelled a decent rally, but it hardly made a ripple last week. When foreign investors are running back to America and its dollar, valuations are about to compress. What will retail investors do?

While a lot of the market’s future depends on global volatility and the domestic economy, there is one factor that could make or break the market: the retail investor’s wallet. Armed with savings since the pandemic, there has been a surge in domestic retail investment in equities and the trend hasn’t petered off. But as our Chart of the Day shows, these investors have not seen a bear market at all and are about to get their conviction tested now. The lion’s share of these retail investors has come through the mutual fund route. Despite the destruction of $4 trillion worth of market capitalisation, the odds of valuations climbing up are reducing by the day. Warning shots against midcaps and smallcaps have already been fired by many notable market veterans from ICICI Prudential AMC Ltd’s S Naren to Bernstein's Garre. A tariff hit during an expected cyclical slowdown in the economy could be the final nail in the coffin.

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