Three key risks and a reality check: Uday Kotak on equity valuations, Trump's tariffs, and dollar strength

Kotak also spoke about the disappearance of animal spirits in India. He attributed this to the next generation of promoters focusing on managing family offices and investments rather than running operating businesses.

While financialisation is important, too much of it can hurt the economy, especially if investors do not understand stock market valuations and move their entire savings into equities, Kotak Mahindra Bank’s founder and director Uday Kotak has said while speaking at the Kotak Institutional Equities' Chasing Growth 2025 investors conference.

Aside of the steep valuations in the stock market, Uday Kotak in his address also red-flagged the need to carefully navigate the reciprocal tariffs, at a time when the US dollar has gained quickly strength.

Changes in the Trump era

Kotak said India's strategy in the current Trump era should be to steer clear of protectionism, and instead work on building India's global competitiveness.

The ‘Trump era’ has already seen changes in many rules of the game, Kotak said, primary one being the shift in capital flows. The strength of the US dollar is stemming from an increasing investor inclination to hold dollar assets, unlike the previous ‘era’ where investors were looking at diversifications across asset classes, said Kotak. This comes at a time when US equities alone accounts for as much as 70% of the global market capitalization.

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Aside of the risk to foreign flows, Kotak believes President Trump’s intent to correct US trade deficit with India may put an additional pressure on India’s CAD.  India’s trade structure may thus need to change across economies, in order to rebalance the trade, he said. Currently, India’s Current Account Deficit is under control at 1.2-1.3 percent of GDP or around $50 billion. In fact, with respect to US, India has a roughly $40 billion of trade surplus.

Tariffs play a crucial role in the bilateral trade between the two nations, with India imposing around 10% tariff on American goods, while the US imposing 3% tariffs on Indian goods. The veteran banker believes that as Trump’s reciprocal tariffs take effect, they will create surplus capacity in other countries, to sell to the rest of the world at a much cheaper rate.

For a scenario like this, Kotak has laid down a few strategies for India. He believes that India cannot afford protectionism and needs to take advantage of the changing times, to make the Indian industry more competitive. As the new world will give limited room for India to run large Current Account Deficits, India needs to not only avoid protectionism but also improve productivity and increase manufacturing as a percentage of GDP, the veteran banker added. Kotak also highlighted the need for execution in both macro and microeconomic policies in India.

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The times ahead will also call for a gradual fiscal consolidation, said Kotak, adding that India needs to move from micro-management or over-regulation toward ushering in growth and competition. For this, the nation needs to ensure a free and fair markets at all points in time, he added. Kotak also pointed out that the Indian stock markets are now resilient, and at scale, for foreign investors to move in and out.

These are some of the other key highlights of his address:

On Tax Rebates
The income tax rebate makes deposit-taking businesses more competitive, but Kotak added that as the liability side improves, the Goldilocks era on the asset side ‘appears to be over’, hinting at stress in the unsecured loan portfolio. There are some signs of that appearing in micro-finance and unsecured sectors, he added.

Success of QSR and impact of AI
Kotak lauded the success of India’s quick service retail and said it has potential to create global consumer brands. On the risk of AI on education and productivity in the financial sector, Kotak said there is a need to create new opportunities and jobs in the post-technology and post-AI world.

Hard Work and Success of the Nation
Kotak spoke about the animal spirits diminishing in India, especially after the pandemic. The next generation of promoters are focusing on managing family offices and investments, rather than taking risk and running businesses. There is a need for a commitment to hard work and building businesses to succeed as a country, said Kotak.

Need for Disruption
The BFSI space is seeing a ‘disruption’, said Kotak, citing the example of PhonePe in the UPI market, Zerodha's profitable growth in the broking business, and a Brazilian bank with a $65 billion market capitalization and only 7,000 employees. Kotak stressed on the need for traditional banks to adapt these emerging models.

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