Trump's tariff and penalty undermine India's global safe-haven status, weaken investor interest, says CLSA

Trump's comments could potentially weaken India’s appeal as a recipient of foreign investment inflows (FII), in CLSA's view.

US President Trump's tariff and penalty on India will undermine its global safe haven status and increase the likelihood of continued volatility and relatively weak investor interest in the near term, CLSA said in a note on July 31.

The action by Trump questions India’s advantageous trade position with both the US as well as Russia, and challenges the 'safe haven' status for global investors, which was based on New Delhi's likelihood for securing favourable terms of trade with Washington compared with peers, the note said, adding, "While we were hopeful of India-US relations improving again in the medium term, in near-term uncertainty could further impact an already underperforming though expensive Indian equity market."

Trump's comments could potentially weaken India’s appeal as a recipient of foreign investment inflows (FII), in CLSA's view.

India's increasing export of electronics and refined petroleum will face a setback following the new tariff and penalties, and investors will also seek clarity on specific impact on export-oriented sectors such as IT, gems and jewellery, textile before deploying any fresh allocation, CLSA added. Oil refiners that have been leaning on competitiveness of cheaper Russian crude imports too face disadvantages.

Potential penalties on trade with Russia make these issues 'a bit more difficult to address', CLSA said, underscoring that a move to shift away from Russian oil may drive up prices higher, and that could negatively impact India. The defence trade too is 'very difficult' to address, given the significant presence of Russian equipment in India's fleet.

"...last four years, have seen India getting the best of both worlds by balancing geopolitical relationship with both Russia and the US in an increasingly bi-polar world. These comments pose a risk to this advantage of India," said the CLSA note.

Effective August 1, US will impose a 25% tariff and additional penalties, which are not specified as of now, but President Trump has also kept the door open for a possible negotiation. "The financial market has seen US President change his mind on many issues. So, this may not be the final word, and we remain hopeful of an eventful deal with the US as trade discussions continue between both nations in August," the note added.

Equity markets will be watching for cues on potential diplomatic talks between the two countries, and it is likely that Trump’s penalties may be seen as a negotiation tactic for a broader trade discussion with India and Russia, CLSA said. Given India's elevated valuations and earnings cuts, it is possible that equities may continue to underperform until clarity emerges, CLSA said, adding, "...this may make it more difficult to attract FII inflow, unlike previous episodes of notable underperformance of India to peer markets."