Moneycontrol Pro Weekender | Tariffs and Tensions: Has the US-India bond fractured?

India-US Bond

Trump's tariffs have finally hit India. Not that he has singled us out for particularly harsh treatment. South Africa has been hit with 30 percent tariffs, perhaps as punishment because Trump imagines there's a white genocide happening there, Canada faces 35 percent for not cracking down on fictional fentanyl shipments to the US, Laos gets 40 percent God knows why, Bosnia Herzegovina-- with whom the US had a trade deficit of a mere USD 126 million in 2024--has been slapped with 30 percent tariffs, and Switzerland faces a 39 percent tariff, perhaps because its cuckoo clocks have been taken as a personal insult by the US president. It's a circus.

Nevertheless, the 25 percent tariff on India is high because the baseline tariff is now 15 percent, applicable to most nations. In addition, Trump has threatened to impose penalties because India has been buying Russian oil and defence equipment. What on earth happened to the special relationship India was supposed to have with the US? What does the US leader's cosying up to Pakistan mean—Trump signalled a deal to develop Pakistan's so-called oil reserves, and its tariff rate of 19 percent is well below India's. Could it be a pressure tactic to get India to sign a deal that has big advantages for the US?

These tariff blitzes have brought US levies to their highest levels since the 1930s, a sobering reminder of the protectionist spiral that preceded the Great Depression. Yet paradoxically, the IMF has turned suddenly bullish on global growth even as tariff wars rage across continents, due to a combination of firms trying to stock up inventory ahead of the tariffs taking effect and loose financial conditions.

That could be a reason why the initial reaction of the markets has been rather muted. Perhaps they anticipate that India will soon manage a better deal—we wrote ‘In Trump’s own words, the US is “talking to India now,” and that “we’ll see what happens.” This indicates that there is room for a rollback.’ Market experts suggest the tariff impact is already priced in, and we worked out the impact on various sectors and stocks, and at what level it becomes a buying opportunity. So far,  domestic institutional investors have kept the faith, with equity inflows crossing Rs 4 lakh crore so far this year—the second-highest since 2007—even as global funds like GQG, BlackRock, and Invesco see massive outflows from emerging market funds.

The currency implications are particularly stark. Trump's tariff bomb threatens to deal a blow to the Rupee, forcing the RBI into a delicate balancing act as the Fed maintains its hard line.

Energy security remains a critical vulnerability. India's continued purchase of Russian oil has triggered Trump's penalty threats, raising fundamental questions about whether India can avoid secondary sanctions while maintaining strategic autonomy. This dilemma crystallizes India's broader challenge—it can neither give in completely to American pressure nor give up its independent foreign policy.

Additional signs of a macro slowdown in India emerged this week. Manufacturing tells a sobering tale with 10 out of 23 sectors still producing below pre-COVID levels, even as government capex rises sharply, suggesting public investment is compensating for private sector hesitancy. Data for the April-June quarter on central government finances showed a sharp decline in gross tax revenues, indicating an economic slowdown.

This slowdown is reflected in lower domestic volumes at Maruti, in Dabur’s volume de-growth, in Dalmia Bharat’s flat Q1 volumes. However, there will always be companies that will buck the trend, and we saw volume growth in HUL in the last quarter, as we pointed out here and here. And Shriram Finance’s results indicate growing demand in the rural market.

The silver lining is that India is having a good monsoon, inflation is low, services exports are strong, as are forex reserves—as this article tell us, domestic strengths trump global uncertainty. Also, there is scope for further relaxation in monetary policy, as we wrote here.

The corporate earnings season tells a more nuanced story. Companies are navigating the uncertainty with mixed results. Mahindra & Mahindra is shifting to a higher gear, while this defence sector company is poised for strong revenue growth, perhaps benefiting from the very geopolitical tensions that are reshaping trade flows. Some indicators suggest that the commercial vehicle sector is coming out of its slump.

Companies are adapting to the new realities. TCS's cost rationalization strategy addresses immediate challenges, though growth recovery remains uncertain. Indeed, employee attrition had been ticking up even before the current wave of layoffs. Globally, amid uncertainties about AI investments, Big Tech's mammoth spending on the AI arms race has begun to show potential pay-offs for investors. The disconnect between layoffs and fund manager confidence in IT stocks reveals how markets are pricing in long-term transformation over short-term disruption. Tata Steel is steering through a challenging global steel environment by focusing on cost transformation, green technology integration, and prudent capital allocation.

The real estate market shows continuing optimism with realty developers confident of steady demand in premium and luxury homes. It is in this context that Sri Lotus Developers & Realty Ltd, which is focused on high margin luxury redevelopment projects, has come out with its IPO, which we analysed here. Real estate has also been driven by domestic liquidity and the search for inflation hedges as gold prices maintain their glitter.

The challenge for India is clear: it must seize the moment for a comprehensive trade deal with the US while maintaining its diverse partnerships, strengthen domestic manufacturing capabilities while remaining globally competitive, and navigate the currency pressures while keeping inflation expectations anchored. Whether Indian companies will thrive, survive, or flail in this new tariff dawn depends not just on government policy responses, but on their ability to adapt business models to a world where economic logic increasingly takes a backseat to political calculations.

The circus may be mad, but the show must go on. Do read about the three factors that are likely to guide the course of the market in the near term.

The song of the week, Bob Dylan’s ‘Positively 4th Street’ has these lines so appropriate for India-Trump relationship:

‘You got a lotta nerve
To say you are my friend…’

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

Syrma SGS Technology Q1: Impressive operating show despite revenue dip, Amber Q1FY26: After a quick rally, is there more steam left in the stock? Swiggy Q1 FY26: Steady performance, but profitability remains a concern, International Gemmological Institute India: Facing the US tariff headwinds, Eicher Motors Q1FY26: Maintains growth despite margin dip, Dabur Q1FY26: Demand recovery, valuation are key positives, Sun Pharma: Innovative drugs are near-term growth drivers, Tata Motors expands CV empire with Iveco Group NV acquisition, Waaree Energies Q1: Execution strength drives growth, KEC's T&D business powers earnings momentum, Gabriel India: Primed for growth but priced to perfection, IndiGo Q1 FY26: Soft quarter with a promising outlook, Varun Beverages: International growth offsets headwinds from unfavourable weather, Laurus Labs: Is it time to book profit? SJS Enterprises Q1 FY26: On track to meet growth targets, Larsen & Toubro: A healthy start to FY26, Asian Paints Q1 – Should you trust the green shoots? NSDL IPO – Does it deserve a place in your demat account? Sri Lotus Developers: Will the IPO give investors a luxurious experience? M & B Engineering IPO: The business design looks robust, GAIL Q1: Petrochemicals a drag, pipelines promising, Syngene: How soon can it overcome near-term worries? Vijaya Diagnostic: Healthy show continues, How do these two affordable HFCs compare, post their Q1 results? IndusInd Bank Q1 FY26 -- The worst may be behind, but is it worth waiting for the best? Aditya Infotech IPO: Big vision, bigger valuation — Should you bet on it? Cipla: Non-US markets to drive growth in the near term, Kotak Mahindra Bank Q1 FY26: a blip not a blow, Sky Gold & Diamonds: Correction adds shine to the valuation of the stock

Markets

Market activity slows sharply in July amid weak sentiment, regulatory curbs

Trump's potential penalties could impact market more than tariff hike

The great market divide

Applying Equity Principles to Crypto: Smart diversification strategies

Financial Times

Mohamed El-Erian: Reasons for caution amid America’s triumphant market surge

Will Mark Zuckerberg’s secret, multibillion-dollar AI plan win over Wall Street?

How Novo Nordisk lost its lead in the weight loss race

How the EU succumbed to Trump’s tariff steamroller

Donald Trump’s EU oil and gas deal is ‘pie in the sky’, energy experts warn

Companies & sectors

As Trump tariffs unravel apparel and textiles exports, India needs to offer protection

Is global steel output feeling the heat from US tariffs?

Economy & Policy

UPI’s free ride for all nearing its end?

Are carbon clouds gathering over the India-UK FTA?

Farm productivity is the panacea for rural labour, income woes

India’s digital payments are surging, so are the risks

RBI study finds Indians can’t agree on inflation expectations

Pro Economic Tracker

Geopolitics & Geoeconomics

What China’s $137B dam on the Brahmaputra means for India’s Northeast & Bangladesh

What does the EU-US trade deal mean for global trade uncertainty?

Personal Finance

Is buy and hold a valid strategy?

Politics

How language politics could reshape West Bengal's electoral landscape

Tech & Startups

Race for AI supremacy — A test of real intelligence for America, China

Payment fintechs are getting squeezed as banks add charges for UPI merchant transactions

Apple 'open to' AI acquisitions to accelerate roadmap, says Tim Cook