Daily Voice: Likely inflationary pressure, economic slowdown could force United States to rethink tariffs policy over time, says DSP MF’s Vinit Sambre

Vinit Sambre is the Head - Equities at DSP Mutual Fund

Vinit Sambre, Head - Equities at DSP Mutual Fund believes that 50% tariffs will inevitably have second-order effects—most notably by adding to inflationary pressures in the US and raising the risk of economic slowdown.

These consequences, in turn, could compel the US to reassess and recalibrate its trade policy over time, he said in an interview to Moneycontrol.

According to Vinit, interest rate reductions, income tax benefits, and potential rationalization of GST rates will drive an improvement in consumption. "With inflation under control, the recovery is likely to be more broad-based, extending to lower-income groups and rural households as well," he said.

Over the last 3–4 years, equities have proven to be one of the best-performing asset classes. More importantly, over the long term, investors’ experience with systematic investment plans (SIPs) in equities has been highly rewarding. SIPs help absorb short-term volatility and, for those who remain patient, have delivered significantly better outcomes.

That said, India’s equity participation remains low, with household incremental allocation to equities / MF still around 5-6% of their total savings. Encouragingly, the structure of SIPs makes them affordable and easy. Much like demand elasticity in other products, the low-ticket nature of SIPs ensures that they do not strain investors’ pockets. Because of this, most investors tend not to disturb their SIP contributions—even when markets turn volatile—since the amounts are small and manageable.

This behaviour suggests that investors are not merely being “contrarian” rather, they are showing greater maturity and discipline, positioning themselves to benefit from the long-term outperformance of equities.

Retail inflation is currently near its lows, largely due to a deflationary trend in food prices against last year’s high base. However, this effect may begin to normalize in the coming months.

On interest rates, while stable prices provide some room for the Monetary Policy Committee (MPC) to consider cuts, the decision remains heavily influenced by global factors. Concerns around a weakening INR, particularly if US tariff tensions escalate, could make the RBI cautious about easing too soon.

A 50% tariff is undoubtedly steep and, if sustained, will immediately impact few sectors such as textiles, automobiles, chemicals, etc. That said, India’s direct exposure to US is relatively limited and account for roughly 20% of India’s total exports. This makes the situation less concerning for India compared to economies like Europe or Japan, where the US is a far larger trading partner.

Looking ahead, the US could become an increasingly important market for India. From that perspective, it is crucial that trade diplomacy works toward securing more favourable terms for Indian exports.

At a broader level, our core belief is that such high tariffs will inevitably have second-order effects—most notably by adding to inflationary pressures in the US and raising the risk of economic slowdown. These consequences, in turn, could compel the US to reassess and recalibrate its trade policy over time.

The government has already announced plans to rationalize GST, which is likely to benefit a wide range of industries and provide a boost to consumption. On the trade front, India has signed a Free Trade Agreement with the UK and is close to finalizing one with the EU—steps that help mitigate the potential impact of higher US tariffs, should they come into effect.

In addition, monetary stimulus has been provided through interest rate reductions, while recent increases in basic income tax exemption thresholds offer durable support to middle-income households.

Taken together, these measures are well-positioned to stimulate demand and support a broad-based recovery in India’s economic growth.

At this stage, it is too early to make definitive comments, given the high level of uncertainty. However, once there is greater clarity on policy matters—particularly around tariffs—we believe companies will be in a stronger position to recalibrate and work out strategies to identify and capture emerging opportunities.

Our base case assumption is that interest rate reductions, income tax benefits, and potential rationalization of GST rates will drive an improvement in consumption. The second half should see stronger momentum, further aided by a favourable base effect from last year. With inflation under control, the recovery is likely to be more broad-based, extending to lower-income groups and rural households as well.

Given the current rich valuations, we believe markets have already priced in much of the positive news. As a result, there is a strong likelihood of a consolidation phase over the next year or so. While market flows are difficult to predict, the continued strength of inflows suggests that any dips are likely to be bought into. This should, in turn, limit the scope for large corrections.