Trump victory, strong dollar may spark further FII outflows from India

Analysts cite Trump’s stand on tariffs as a big challenge of his presidency for emerging markets.

As the US enters the final day of a deadlocked presidential race, analysts predict a Trump victory could accelerate foreign portfolio outflows from India, driven by a stronger dollar and renewed investor interest in US assets.

Equity markets worldwide witnessed increased volatility due to the close race and uncertainty over the election outcome. The impact was evident in India too, where the benchmark indices tumbled over 1 percent on November 4. The National Stock Exchange’s benchmark Nifty index ended the month of October with a decline of about 6 percent amid the highest-ever FII outflows from the domestic markets.

Sheetal Malpani, Chief Investment Officer and Head of Equity at Tamohara, believes some of the money is moving back to the US as the dollar has gained surprise strength, and in case US Presidential nominee Donald Trump wins, some of his policies might make the US market relatively more attractive.

“FII outflows have been largely because results season is pretty bad with earnings growth in low single digits, leading to earnings cut across the board. Secondly, FII has done some China readjustment as they were massively underweight China, and the upmove in the Chinese market caught them by surprise,” he added. “Trump winning shall mean higher than expected inflation, implying higher treasury yields and a strong dollar, which is not so good for EM countries,” he said.

Foreign investors pulled out a massive Rs 94,000 crore from the Indian stock market in October, making it the worst-ever month in terms of outflows. In November, too, the trend remains unabated, with FIIs offloading equities worth Rs 4,329.79 crore on Monday.

Analysts still do not see any signs of FIIs returning to India anytime soon, “Ideally, the 1st calendar quarter of 2025 could witness a return of the FII flows, post the current quarterly earnings reports are out,” said Aamar Deo Singh, analyst at Angel One Ltd.

Parthiv Shah, Director, Tracom Stock Brokers Pvt Ltd, echoed similar sentiments. He does not see FIIs returning for at least the next 3-6 months. “FII would be back only if US growth slows considerably, and thereby further rate easing which would bring more flows to EM like India.”

Analysts cite Trump’s stand on tariffs as a big challenge of his presidency for emerging markets. Although China could be the focus of his stand on tariffs, India may also feel the effects. His tough stand on higher import tariffs and tax cuts for American corporations may be good for US markets, but emerging markets may feel the pressure.

“His Make in USA and anti-China stance of tariffs would be inflationary which would delay the FED rate reduction further beyond what has already been done, but with growth-oriented policies that won’t be welcoming for the markets both globally and domestically,” stated Parthiv Shah.

Meanwhile, Emkay Global is of the view that “China equities would bleed” if there is a sweep by the Republican Party, which, in turn, would be “tactically positive” for India in terms of FPI positioning.

Trump banned high-tech exports to China, citing unfair trade practices and national security during his 2017-2021 presidency. He had also imposed tariffs on chipmaker SMIC and Huawei during his regime.

V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services, however, believes that the impact of the US presidential election result will be only short-term. “It is important to note that stock markets have responded positively to both Republican and Democratic victories,” he said.

In the past, most election results had a positive short-term effect on the market. During the last three presidential elections, the stock market responded positively to the victories of Obama, Trump, and Biden.