Dear Reader,
This week brought badly needed good news -- a ratings upgrade for India from Standard & Poor’s, bringing its sovereign rating to BBB from BBB-. The upgrade has come after 18 long years, and India’s rating is now at par with Indonesia and Mexico. Far more importantly, the thumbs-up is a resounding vote of confidence in the Indian economy, at a time when Trump’s tariffs seem to have singled out India for rough treatment.
The S&P statement clearly says, “We believe the effect of US tariffs on the Indian economy will be manageable. India is relatively less reliant on trade and about 60% of its economic growth stems from domestic consumption.” It adds, “Though the US is India's largest trading partner, we do not expect the 50% tariffs (if imposed) to pose a material drag on growth. India's exports to the US constitute about 2% of GDP. Factoring in sectoral exemptions on pharmaceuticals and consumer electronics, the exposure of Indian exports subjected to tariffs is lower at 1.2% of GDP. Though this may eventually result in a one-off hit to growth, we envisage the overall impact to be marginal and will not derail India's long-term growth prospects.”
That may well be true, but what of the secondary impact stemming from job losses in labour-intensive sectors such as textiles, shrimps and gems & jewellery? And what could be the reason for the upgrade now instead of earlier, when the Indian economy was stronger and the external environment far more benign? As Mae West is supposed to have said, "Timing is everything"— and S&P's timing certainly raises eyebrows.
S&P has cited India’s robust economic growth, public investment in infrastructure, fiscal consolidation, and lower inflation which is supportive for further monetary easing as reasons for the upgrade. Of these, it is the fall in inflation that has occurred recently. As a note by Nomura economists Sonal Varma and Aurodeep Nandi points out, one-year ahead household inflation expectations have fallen to their lowest since 2019. And retail inflation for July was at an eight-year low. Lower inflation and good monsoons are expected to boost consumption demand in the second half of the fiscal year. Perhaps it is these factors that contributed to the timing of the ratings upgrade.
A research note by Madhavi Arora, Lead Economist at Emkay Global Financial Services, says the upgrade into a higher investment-grade category can open the door for new pools of global capital. This will lower India’s risk premia and reduce cost of borrowings for the economy at large. It would help India finance its fiscal and current account deficits, significant in view of the fragile global environment.
Adding to the optimism was the 7.3 percent rise in merchandise exports in July, but much of that was on account of front running before the tariffs came into effect. Year-on-year growth in non-petroleum exports was a strong 13.8 percent. Non-oil, non-gold and silver imports grew 7.6 percent y-o-y in July, indicating decent domestic demand.
Indeed, the timing of the S&P ratings upgrade is exceptionally comforting, coming as it did a day before the Trump-Putin meeting in Alaska. At the time of writing this newsletter, the Trump-Putin meeting is yet to happen. The Indian markets are focused on a possible de-escalation of US-Russian tensions, which will undercut the rationale for Trump’s punitive tariffs of 25 percent on Indian goods for the purchase of Russian oil.
If a road map for the end of the Ukraine war emerges, that should boost market sentiment, as geopolitical uncertainty is reduced. Any de-escalation between the US and Russia will lower the global risk premium, leading to a resurgence of risk-on sentiment and foreign portfolio inflows, which should strengthen the Indian rupee. That, in turn, will make imports such as oil, electronics, and fertiliser cheaper, further reducing input costs. One caveat is that it may reduce India's leverage in discounted Russian oil -- a key benefit during the war period. But the broader benefits would more than outweigh any negatives.
Simply put, India has much at stake from a de-escalation of tensions in Ukraine. Success could bring welcome tariff relief and market stability while failure could mean prolonged economic pressure and continued geopolitical uncertainty.
But even if a Trump-Putin deal materialises, there’s also the broader issue of Trump’s seeming disenchantment with India — a sentiment that now extends beyond just trade deficits. From strategic neutrality on Ukraine, to India’s participation in BRICS, to defence deals with Moscow, the perception in Washington’s new hard-line circles is that India has yet to choose sides. US Treasury Secretary Scott Bessent’s recent remarks labelling India as “recalcitrant” underscore this mood shift. Also, unlike traditional trade disputes focused on market access or dumping, Trump’s tariffs are aimed at coercing India into changing its foreign policy behaviour -- particularly its relationship with Russia. Trump views trade policy as subordinate to broader strategic objectives, making resolution much more complex than typical trade negotiations. Carl von Clausewitz famously said that "war is politics by other means"—Trump seems to believe trade wars are foreign policy by other means. This represents a fundamental shift from economic to geopolitical leverage through trade tools and is an assault on India’s strategic autonomy.
The government’s chief economic adviser has said that while the current tariff scenario remains extremely uncertain, it is likely to be resolved within a quarter or two. He also said we may expect support measures sooner rather than later for the affected sectors. My colleague Abhijit Dutta wrote here that exporters need immediate incentives in these uncertain times.
In short, the S&P upgrade couldn't have come at a better time—offering India a financial cushion just as it faces its biggest test of balancing economic growth with strategic independence in an increasingly polarised world.
The song of the week is ‘Stuck in the Middle With You’ by Stealers Wheel. It captures India's delicate position between competing superpowers. Here’s the refrain:
‘Clowns to the left of me
Jokers to the right
Here I am stuck in the middle with you.’
Cheers,
Manas Chakravarty
In case you missed them, here are some of the other stories and insights we published this week, apart from our technical picks in the equity, commodity, and forex markets:
Stocks
Zydus Lifesciences: Time to accumulate the stock? Cello World, Protean, Apollo Hospital, Va Tech Wabag: Can this water stock create waves on bourses? Hyundai, PG Electroplast, Hindalco, Blue Star, Cholamandalam Investment, Lemon Tree Hotels, Bluestone Jewellery and Lifestyle IPO, SBI, Potholes on the path, but Tata’s long drive is not over, Tata Power, Sai Life Sciences, Cummins India, Hindalco
Markets
Why the market rally is on thin ice
S Naren sees 90s-style boom-bust risk, says large caps are the only safe harbour
Staying the course: How Indian investors are weathering market volatility
SEBI prioritises ease of doing business in market overhaul
AIFs’ liquidity stress untested: Small- and mid-cap bets carry ‘narrow exit windows,’ warn fund managers
Can you trust the buy-and-hold approach to investing?
Eliminate taxes on trading, listings to encourage investments and investor participation, says World Federation of Exchanges
Financial Times
Who pays for the $3tn AI building boom?
Ruchir Sharma: America doesn’t have a monopoly on wealth creation
Europe builds for war as arms factories expand at triple speed
Strategic interdependence is rewiring the global economy
Companies and sectors
AU Small Finance Bank’s leap to universal banking
ICICI Bank and the premiumisation of bank accounts
IT layoffs are unfortunate, but will help companies emerge stronger, stay relevant
For Fortis, Gleneagles provides both a challenge and an opportunity
Sugar mills headed for output-led bounty in 2025-26?
Indian NBFCs are in a good spot now
Economy & Policy
Trump tariffs — Be firm, but focus on farm
RBI surveys confirm Indian consumption divide
Proposed IBC amendments fortify the code, lenders get more power
India’s electronics exports pick up, but can this sustain momentum?
Interstate collection efficiency improves in power transmission assets
Bountiful rains fill up water reservoirs
Pro Economic Tracker
From Independence to 2047: How economic liberalisation transformed India, will drive future growth
Geopolitics & Geoeconomics
Can Trump broker peace in Ukraine without Zelenskyy's consent?
India-US-Russia ties: Who needs whom?
Global powers need to focus on the threat posed by nexus between the nuclear arms race and AI
Tech & Startups
The AI driven nuclear energy race is hotting up
India’s AI startup funding jumps 50% to $665 million as investors chase targeted applications
Quick service, quicker repairs: 15-minute home services become quick commerce’s next act
Others
Personal Finance | A primer on how to use PE in investing
Will the new sports governance law help make India a sporting giant?
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