Moneycontrol Pro Panorama | What’s driving the outperformance of Indian equities?

India looks fairly shielded from the US tariff impact.

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The Indian equity market seems to be challenging bear cohorts as it recouped losses incurred after US President Donald Trump ratcheted up tariff tensions with its trading partners. Eventually, the harsher reciprocal tariffs were put on hold but the 10 percent base tariff remained. As at noon today, India’s Nifty and BSE Sensex were the only indices in the green since the tariff blow, up 3.4 percent and 3.6 percent in local currency terms, respectively, compared to April 2, outperforming emerging market (EM) peers and also the Dow Jones, S&P 500 and FTSE 100 indices.

Investors may be stumped by this sharp reversal in fortunes! Trump’s tariffs were targeted at paralysing imports from EMs into the US, including India, in some sectors. The U-turn in Indian benchmarks and importantly, declining outflows of Foreign Institutional Investors (FIIs) seem to indicate a moderation in pessimism on the Street.

What has changed for India? Indeed, the 90-day respite from a pause in US tariffs has given a breather and perhaps room to negotiate trade terms between the two countries. In this context, US Vice-President J D Vance’s discussions with Indian leaders during his current visit to India are expected to pave the way for collaborations in areas such as energy, defence, and technology. While seeking lower duties on auto parts, textiles and some pharmaceuticals, India plans to offer to lower import duties on some farm goods from the US.

Even otherwise, analysts reckon that India (per the initial reciprocal tariffs) is favourably poised in terms of the magnitude of duties compared to other EMs. A case in point is Google looking to shift Pixel production to India after the US proposed 46 percent levy on imports from Vietnam, higher than the proposed 26 percent on India. Textile manufacturers are also looking to benefit from the edge conferred by favourable duties in comparison to that levied on competing nations. If India acts smartly and decisively with strategic policy and planning, it is poised to garner a higher export share in world markets.

Cut to financial markets, US investors are worried about being caught between inflationary pressures, elevated interest rates and a weaker dollar. Meanwhile, the damage from uncertainty in policymaking is weighing down on US’ credibility and its financial markets. Not surprisingly, bond markets have turned volatile and equities are tanking, as global investors pare their US exposure.

To be sure, China’s improved economic growth in the last few quarters could have posed risks to equity flows into Indian markets that were trading at high valuations. However, the relentless tariff war between the US and China will only make investors more cautious on investing in China.

In comparison, the case for investing in Indian equities looks stronger. At this point, India looks fairly shielded from the US tariff impact. Another advantage is its vibrant domestic economy that has been supported on the twin legs of public capital expenditure and consumption. For India, the worst is behind on FII outflows, the high volatility phase that was detrimental to the rupee is past, inflation is tamer and interest rates are benign, points out a report by international investment management firm Sanford Bernstein. Of course, there are risks to growth from the visible slowdown in government capex and moderating urban consumption.

The FY2025 results that are currently ongoing and management commentary on the implications of global tariffs and outlook on domestic challenges, will determine which way valuations will head in the coming weeks and months. Indian benchmarks are retracing their losses, but are still about 8 percent away from the 52-week high scaled in September.

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