Trump tariff may cut GDP growth forecast by 25 bps, reduce Nifty earnings by 2–3%, says LGT’s Stefan Hofer

The decision to keep US policy rates unchanged at yesterday’s meeting was in-line with market expectations. As expected, while very unusual, there were two members of the committee that dissented. We expect to see further public criticism of the Federal Reserve’s position by President Trump, but Chair Powell is set to remain in his position until May 2026.

Do you believe the rate cut cycle — which has been on hold since the start of this year — will begin with the September meeting? Do you foresee two rate cuts before the Fed enters a prolonged pause?

The Federal Reserve is taking a 'wait and see' approach to monetary policy; core Personal Consumption Expenditure prices have increased of late, and the full impact of new, punitive import tariffs have yet to work their way through the system. In this regard, we are in unprecedented times. What can be said is that futures markets are (still) pricing in two cuts in 2025.

How do you interpret the imposition of 25 percent tariff on India along with penalty over trade with Russia?

At this early stage, details are lacking to form a full picture on the economic costs to India, be it the 25 percent tariff or additional levy on trade with Russia. In aggregate, we don’t expect material downside to India’s economic growth, albeit some sectors may be more impacted than others. In addition, tariff levels can change suddenly so making long term conclusions on impacts would be premature.

The US tariff of 25 percent cuts India’s GDP growth to about 6.25 percent from 6.5 percent. The overall earnings cut would be about 2-3 percent on the Index since India is largely an 85 percent domestic economy. If tariff remains unchanged at 25 percent, it reduces 20 percent of overall exports by about 10 percent, so the cut is about 2 percent. India will be able to find other markets to export to.

Do you think Indian markets are overreacting to the tariff concerns?

The Trump Administration has ended the post-World War II consensus that Free Trade and globalisation are a net benefit to the world economy. Even at a minimum universal import tariff of 10 percent, this marks a significant break with the past.

From this perspective, the new tariffs are a global issue, not limited to one economy or market. We expect lower growth and import demand in the US for 2H-2025, before a reacceleration in 2026, driven by the fiscal thrust of the Big Beautiful Bill.

How do you interpret the delay in finalizing the India–US trade deal?

There is an element of brinkmanship in these negotiations, and President Trump has full authority to unilaterally change and/or delay any tariffs on Indian exports to the US. The equity market will likely take any finalised deal with a degree of relief, in that it allows for an outcome to price into risk assets. That said, investors hope for as low as possible tariffs.

Do you expect President Trump to extend the August 1 tariff deadline, or do you anticipate major tariff announcements on the same day?

There is room for an extension if the US feel India needs more time to address specific issues, be it pharmaceuticals or other key exports to the US.

What is your assessment of the recent US–EU deal?

The fact that a deal exists now is being taken positively by the market. However, relative to previous very low tariffs, the new regime will likely shave some growth off EU GDP heading into 2026. On the plus side, Europe is taking on a major defence and infrastructure spending plan, casting aside fiscal and debt constraints. It remains to be seen if these measures can compensate for the drag coming from punitive tariffs.

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