Trump's tariff to hurt these sectors most-exposed to US; may shave off up to 50bps of growth

US President Trump’s reciprocal tariffs on trading partners has triggered a measured selloff across global share markets, including India, though Moneycontrol learnt from sources within the government that the New Delhi is not looking at the imposition as a setback, and is hopeful of exemptions. Although, as HSBC's global report mentions, India receiving a "hefty 26% reciprocal tariff" arithmetically may shave off up to 50bps from growth this year.

“Trump went all out. He didn’t give any rule for exemptions,” said market expert, Kranti Bathini.

Frederic Neumann, Chief Asia Economist, Co-head of Global Research Asia, and Justin Feng, Economist, Asia, also mentioned in the report, "Given that pharmaceuticals, a key Indian export to the US, were largely exempted from the reciprocal tariff, the impact could have been larger. We also note that India is currently in the process of negotiating its first tranche of an eventual FTA with the US and can offer concessions such purchasing more US oil and defense goods (at the expense of Russia), as well as lowering tariffs on agricultural products and electric vehicles."

From a positive perspective, they expect trade risks to seemingly act as the catalyst for India’s much needed reforms, including slashing tariffs, hastening trade agreements, opening up to regional FDI, and making the rupee more market determined.

Siddharth Khemka, Motilal Oswal’s Head of Research said he expects demand in US to take a hit after cheaper imports faced additional levy by President Trump. “It’s basic economics - when prices go up, demand takes a hit... There’s only so much US consumers can spend, and their incomes aren’t rising overnight,” Khemka said.

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Arindam Mandal, Head of Global Equities at Marcellus Investment Managers said that the tariffs announced on April 2 were more severe than anticipated. "While the market had expected the effective tariff rate to be in the high teens, the actual rates are now projected to be in the mid-to-high 20% range – possibly the highest we have seen in a century, a significant increase from the previous 2.5–5% levels," the Marcellus analyst added.

Pharma Dodges the Bullet but Others Hit

Analysts said they will watch the IT space, along with gems and jewellery, for negative impact. Even though Trump’s tariff threat was getting digested by the market in phases, the near 50 percent tariff rate is no good for the short term, analysts agreed.

Read More: Nifty Pharma soars 4.5% on exclusion from Trump's reciprocal tariffs

Market expert Ambareesh Baliga said, "Gems & jewellery sector is the one which would be most affected as the tariff goes up to 26%. EMS may not get as affected as there are concessions in place for manufacturing in India. At the same time, the competition has been from China, but higher tariffs on China, Vietnam and other South Asian countries puts us in a slightly more comfortable position," Baliga added.

Khemka also pointed that companies with around 30-40% revenue dependency on US will face significant challenges, and hence, IT will be under negative influence, even if much of it is services driven.

"The IT sector is almost universally seen as a casualty of these tariffs, given its significant reliance on exports to the US," said Bathini. "How IT reacts today is crucial, given the dependency of companies like Tata Consultancy Services and Infosys on the American market,” Kranti Bathini added. The Nifty IT index opened sharply lower by over 3.5% on April 3, weighed down by selloff in TCS and Infosys, and other midcap IT names too under pressure.

Siddharth Bhamre, Head of Research at Asit C Mehta mentions about the ambiguity over whether the tariffs apply to services, or just products. As IT companies like Infosys and TCS derive a significant portion of their revenue from the US, any hit could be substantial. “Even if it’s just products, there might still be some speculative selling,” Bhamre added.

The gems and jewellery sector too finds itself caught in the crossfire, as Bhamre highlighted that India being is a net exporter of these products to the US, higher tariffs could dampen export prospects, but added more clarity is needed on whether existing tariffs will be raised, or new ones will be levied.

Bathini fears the US inflation may rise, hurting America consumers’ purchasing power. As luxury spending takes a hit, the demand for gems and jewellery - already under a complex tariff structure - could weaken further. He has also highlighted that even though there were speculations around agriculture, there may not be a major impact since India’s agri exports to the US aren’t substantial, the impact on related commodities is unclear as of now.

Satwik Jain of Generational Capital said the announcements may be relatively positive compared to levies on other Asian economies, and hence liquidity from FPIs could move towards domestic-oriented sectors (likely, retail). For vulnerable sectors like auto and IT, Jain believes Indian government may seek bilateral trade deals with European Union to potentially mitigate the impact, by rerouting some of the trade via Europe.

Khemka is also not entirely ruling out a positive reaction from some sectors but fears a broad-based slowdown shirking global trade. This, in turn, could discourage FPI inflows into India, though it remains to be seen if the fear of stagflation and lower US growth prospects pushes FPIs or FIIs towards safer assets rather than emerging market equities.

Arindam Mandal of Marcellus Investment said there may be some temporary exemptions - such as for pharmaceuticals, semiconductors, and energy - so the tariff impact across these sectors and stocks may be limited in the short term. For instance, in the case of semiconductors, the supply chains are deeply interconnected with China and Taiwan, raising questions about how much any exemption can mitigate disruptions, he added.

Mandal highlighted that the tariffs may act as a tax on consumers, contributing to inflationary pressures. However, weaker demand might temper US inflation and prevent interest rates from rising too sharply.

On a year-to-date (YTD) basis, markets have been partially pricing in these risks, as shown by the outperformance of defensive sectors. "This trend is likely to persist until potential earnings downgrades from these trade actions are fully reflected in the valuations of riskier assets and sectors," Mandal added.

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