Mark Matthews says "discounted" tariffs provide India trade advantage, minimal earnings impact

Mark Matthews, head of research - Asia at Julius Baer

The implementation of "discounted" 26 percent reciprocal tariffs places India at a competitive advantage compared to other Asian counterparts like China, Vietnam, or even Bangladesh, said Mark Matthews, head of research - Asia at Julius Baer in an exclusive conversation to Moneycontrol.

Matthews asserts that, given India's economy is not predominantly driven by exports, the country's earnings projections for FY26 are unlikely to be significantly affected by the US President Donald Trump's recent tariff measures.​

Edited excerpts from the interview:

With President Trump enforcing a discounted 26 percent tariff strategy against India, what are the implications for trade and market sentiment?

The implications are largely negative since this tariff is essentially double what Wall Street had anticipated. The direction from here depends on two key factors.

Firstly, if other countries retaliate by imposing their own tariffs or punitive measures against the US, it could escalate tensions further. However, Treasury Secretary Scott Besant stated that 26 percent is the maximum rate and suggested that reductions are possible. If countries choose diplomacy over retaliation, there is potential for the tariffs to come down.

Secondly, the longer these high tariffs remain in place, the greater the concerns about economic impacts and a potential recession. Swift negotiations between affected nations and the US could help ease these concerns.

How do these tariff changes impact India's competitive position compared to China, Vietnam, and Bangladesh?

It appears the tariff rates were determined based on the size of each country's trade deficit with the US. For instance, Vietnam had a significantly wide trade deficit, which likely contributed to its steeper tariffs. This strategy prevents companies from simply shifting production to another country to circumvent the tariffs.

India, in contrast, does not have a particularly large trade surplus with the US, which means it has fared better than some of its competitors. Compared to China, Vietnam, and Sri Lanka—who received much higher tariffs—India's position remains relatively stronger.

What does this mean from a capital flows perspective, with 26 percent tariffs on India versus 34 percent reciprocal tariffs imposed on China?

While tariffs are a headwind, exports are not the primary driver of the Indian economy. Other economic factors such as interest rate cuts from the Reserve Bank of India, increased bank lending, and government spending are still expected to support growth over the next year.

If exports were a dominant contributor to India's GDP, the impact would be more concerning. However, India’s economy is largely fueled by domestic spending, government expenditure, and consumer demand, making it less vulnerable to external trade shocks.

Pharma was exempted, while auto was hit with a 25 percent tariff. Are there other sectors where the impact will be minimal or positive?

Yes, some exemptions were granted, but this remains a highly fluid situation. The fact that Trump started with very high tariffs suggests they could be lowered through negotiations. However, predicting which sectors will see adjustments is difficult at this stage.

What is clear is that today’s tariff rates are not set in stone—they are likely to look very different in the second half of the year.

Corporate India was banking on FY26 for an earnings recovery. How does this tariff rollout affect expected earnings growth?

While I don't have a specific earnings growth forecast, the impact should be minimal. Much of India’s projected earnings growth was not reliant on goods exports to the US, so the broader market outlook remains relatively intact.

Additionally, if this situation leads to an economic slowdown in the US, it could prompt the Federal Reserve to cut interest rates. This would, in turn, give the Reserve Bank of India more room to ease monetary policy, benefiting India’s domestic economy.

What about the Indian IT sector? Could these tariffs trigger more downgrades, making the sector a riskier bet?

No, the IT sector is based on services, which are not impacted by these tariffs. There should be no direct negative effect from this policy.

India's reciprocal tariffs were lower than those imposed on competitors like Vietnam and Bangladesh. Could this be a positive for the apparel and footwear sectors?

On the surface, yes—lower tariffs make India relatively more competitive in these sectors. However, these rates may still change by the end of the year, depending on negotiations.

That said, while this could benefit India’s apparel manufacturers, its overall impact on the $3 trillion economy is likely to be negligible. Apparel exports are crucial for smaller economies like Bangladesh but are not a major driver of India’s economic growth.

The dollar index is around 103-104. With this tariff rollout, what do you expect from the currency perspective, especially regarding the Indian rupee?

This tariff uncertainty could lead to a shift in U.S. interest rate expectations. The 10-year US Treasury yield has settled around 4 percent, indicating that markets anticipate further rate cuts.

However, in a global risk-off scenario, the US dollar tends to strengthen—even when the problem originates from the US. If market fears persist, the dollar could rise against most currencies, including the rupee.

Does this risk-off sentiment suggest that gold is the safest investment option?

Not necessarily. In a true risk-off event, cash tends to be the best performer, as seen during the 2008 financial crisis.

Gold has already seen a substantial rally, and while it may continue to rise, a correction is also possible. Investors should be cautious about assuming gold will automatically keep increasing in value.