Nifty slid on Trump’s reciprocal and metal tariff threats

·       Almost 60% of Nifty earnings come from exports; thus any potential Trump trade war 2.0 may be negative for export-heavy Nifty

·       Growing USDINR is also not good for the overall import-heavy Indian economy despite some export boosts for devaluing currency

·       Also, too little fiscal and monetary stimulus and tepid earnings growth dragged the market despite a blockbuster win by the BJP in the Delhi election

·       The personal income tax cut in the budget was in line with market expectations, and a good step to boost consumer spending, but it may be too little

India’s benchmark stock index, Nifty stumbled in the past few months on India’s ‘popcorn’ politics, policies, and economic slowdown. Overall Nifty slumped almost 10% in the last four months on India’s worsening macros and growing political & policy paralysis coupled with subdued earnings growth and an escalating Trump trade war tantrum. Modi 3.0 may be more preoccupied with politics rather than appropriate policies to bring the economy from slumber.

India’s discretionary private consumer spending is subdued, affecting overall economic activities due to the skyrocketing cost of living. There has been no price stability in India for at least the last 20 years under both UPA and NDA despite elevated borrowing costs. The average headline CPI is around +5.0% for the last two decades, which means over 100% price rise in the last two decades.

Also, average food inflation in India is around +10.0%, which translates to over 200% price rise of day-to-day food items in the last twenty years on average. This along with increasing costs of fuel/transport, various taxes in the name of development, higher costs of healthcare/medicines, private education, and housing/rents, the minimum comfortable cost of living in India is now around almost INR 87000-105000/M; i.e. over $1000-1200/M for a small family of three (middle-class household). This is against average gross earnings of INR 60000/M for a middle-class household in India.

Moreover, over the last few years, especially after COVID, both Federal and State governments have increased/modified various GST rates for both day-to-day items & services and so-called luxury items & services. The present format of GST is very complex and rates are also on the higher side, resulting in higher costs of goods & services and subdued consumer spending.

In summary, India's economic slowdown is multifaceted, driven by internal policy challenges, declining consumer confidence, subdued private investment, agricultural distress, and adverse global conditions. Addressing these issues will require comprehensive policy reforms aimed at revitalizing growth and restoring investor confidence. To address the slowdown, India needs a multi-pronged approach that includes addressing structural inefficiencies, implementing growth-friendly structural policy reforms, boosting private investments, and fostering innovation and exports. Immediate measures to improve rural demand, ease inflationary pressures, and enhance job creation are critical for long-term growth recovery.

Fast forward, India's Union/Federal Budget for the FY26, presented by Finance Minister (FM) Sitharaman, emphasized boosting middle-class consumption, promoting inclusive growth, and maintaining fiscal prudence. The FY26 Indian budget focuses on balanced growth, with an emphasis on agriculture, MSMEs, investment, and exports as the four engines of development. The budget aims to lower the fiscal deficit to 4.4% of GDP in FY26.

Key Points of the India FY26 Budget:

Fiscal Targets: The FY26 budget estimated total receipts (excluding borrowings) at ₹34.96T and total expenditure at ₹50.65T. Net tax receipts are estimated at ₹28.37T, while non-tax revenue (RBI/PSU dividends & other income) was pegged at ₹5.83T; overall tax, non-tax, and capital receipts should have a growth of around 15% in FY26, but the Government only estimated around 7%. The government aims to lower the fiscal deficit to 4.4% of GDP in FY26, from a revised estimate of 4.8% in FY25. Gross market borrowings are estimated at ₹14.82T, while interest payment on core tax revenue continues to be around 45%. Gross borrowing is set at ₹14.82 trillion, with net market borrowing slightly reduced to ₹11.54 trillion.

Income Tax Reforms: No income tax is required for those earning up to ₹12.75 lakh (~1.275M) per annum under the new tax regime. Salaried individuals earning up to ₹12.75 lakh per annum will also pay NIL tax, due to a standard deduction of ₹75,000. The nil tax slab threshold has been raised to ₹1.2 million annually, with adjusted tax brackets benefiting those earning up to ₹2.4 million.

Agriculture: The "Prime Minister Dhan-Dhaanya Krishi Yojana" will cover 100 districts with low agricultural productivity, benefiting 1.7 crore (17M) farmers. A "Mission for Aatmanirbharta in Pulses" will be launched with a focus on Tur, Urad, and Masoor dal (pulses). A comprehensive program for vegetables and fruits will also be launched. A Makhana Board will be established in Bihar to improve Makhana (Fox Nut, Lotus Seed & Plant Pop) production and marketing. Agriculture: Missions to boost pulses and cotton production.

Manufacturing: Establishment of a National Manufacturing Mission: Startups & MSME Support: Significant enhancement of credit with guarantee cover to MSMEs from ₹5 crore to ₹10 crore; Incentives and funds to support startups and small firms. Manufacturing: A National Manufacturing Mission covering small, medium, and large industries to further "Make in India.

Education and Innovation: 50,000 Atal Tinkering Labs in government schools in the next 5 years. A Centre of Excellence in Artificial Intelligence (AI) for education would be set up with a total outlay of ₹500 crore (~50B).

Urban Development: ₹1T Urban Challenge Fund for ‘Cities as Growth Hubs’ (development of Smart Cities).

Foreign Direct Investment: Proposal to raise the FDI limit in insurance to 100%.

Infrastructure & querying/mining: Focus on regional air connectivity and critical (rare earth) minerals development.

FY26 India Budget Positive Side:

Increased Disposable Income: Tax cuts for the middle class are expected to boost consumer spending, benefiting sectors like real estate and consumer goods.

Fiscal Prudence: A narrower fiscal deficit target may enhance foreign investor confidence and potentially improve India's sovereign rating.

FY26 India Budget Negative Side:

Short-Term Focus: The budget prioritizes immediate economic relief over long-term structural reforms, such as GST, land & labor reform, and deregulations, which are essential for sustained high growth rates.

In summary, while the FY26 Indian Federal Budget introduces measures to stimulate consumption and maintain fiscal discipline, it has faced criticism for lacking substantial reforms necessary for long-term economic growth, price stability, and maximum inclusive employment. The middle-class income tax cut will be around INR 75000 per year, benefitting only around 1.2M people compared to almost 145M people and 30M middle class.

The Income tax cut fiscal stimulus worth INR 1T may be too little to stimulate an INR 300T economy. As per government estimates, India's GDP is expected to grow by 6.4% in FY25 and 6.6% in FY26. The budget's emphasis on agriculture, MSMEs, and infrastructure development is expected to shore up consumption, create jobs, and help India achieve its aim to be the world’s third-largest economy by 2030. Some Economists have also warned that overly aggressive fiscal deficit targets could harm India's economic growth.

In this way, both Federal and state governments are failing to spend even the budgeted amount for projects not only due to election season but also lack of political cohesion between BJP/NDA at the Federal government and INC and various other regional parties at state levels, leading to land accusation issues. Apart from a lack of political bipartisan, India’s infra development is also being hampered by a lack of required machinery and the need to import them, not a very good relation with China, the undisputed king of Infra tech, and last of all, India’s rampant political and admin corruption; almost 30-40% cut money from various projects goes into the hand of po9litical parties and concerned admin officials, leading to poor quality of infra.

The Indian government should also support adequate R&D/innovations, AI, quality free universal education, and healthcare. The increase in ITSD (Income tax standard deduction) from Rs.50K in FY15 to Rs.75K in FY26 was pending from last year and in line with the 5% average CPI (inflation rate); thus the SD was increased by 50% after ten years. The FY26 budget income tax cut was also intended for Delhi middle class and Makhana politics for Bihar ahead of respective assembly elections.

Now from Fiscal to Monetary stimulus, on Friday, the Reserve Bank of India (RBI), under the new leadership of Governor Sanjay Malhotra, announced several key monetary policy decisions aimed at stimulating economic growth while maintaining financial stability.

Key Policy Decisions:

All Key Rate Reduction by 25 bps as highly expected:

The RBI reduced the repo, reverse repo, and other key rate by 25 bps, bringing it down to 6.25% and 6.00%. This marks the first rate cut in nearly five years, signaling a shift towards supporting economic expansion, while still maintaining a neutral stance and restrictive rate as headline inflation (CPI) is hovering above 5% on average, substantially higher than the 4.0% targets.

Rationale for Rate Cut: The decision to cut the repo rate was influenced by a slowing domestic economy and efforts to boost banking system liquidity.

Introduction of Bond Forwards: GSEC derivative trading in the secondary market for better pricing & liquidity: To enhance interest rate risk management for long-term investors, the RBI plans to allow trading in bond forwards. This move is expected to facilitate better pricing of derivatives based on government securities (GSEC)

Liquidity Management:

RBI Governor Malhotra emphasized the RBI's commitment to being agile in responding to the liquidity needs of the banking system. The central bank aims to provide adequate overnight (short-term) and durable (long-term) liquidity to ensure financial stability.

RBI Governor Sanjay Malhotra's Key Comments:

Economic Growth and Inflation:

Governor Malhotra highlighted the RBI's primary objective of price stability, noting that with declining inflation rates, there is room to support growth initiatives. He stated, "Since inflation is coming down, we felt we could be more supportive of growth."

Balancing Growth and Inflation: While there are arguments for a rate cut due to sluggish economic growth, the MPC had to consider stubborn inflation during its three-day meeting. The RBI aims to maintain a balance between economic growth and price stability.

Exchange Rate Volatility:

Addressing concerns about the Indian rupee's fluctuations, Malhotra clarified that the RBI does not target a specific exchange rate but focuses on limiting excessive volatility to maintain market confidence. Malhotra has shown a willingness to allow the rupee to move more freely in tandem with peers in the region.

Global/Trump trade war 2.0 Uncertainty: The policy announcement occurred amidst global uncertainty, including trade tensions arising from new tariffs announced by US President Trump

Regulatory Changes:

The Governor assured that the RBI would provide ample time for implementing changes related to expected credit loss (ECL) and liquidity coverage ratio (LCR) requirements, ensuring a smooth transition for financial institutions.

As per RBI, these policy measures and statements reflect the RBI's balanced approach to fostering economic growth while safeguarding financial stability. This is the first rate cut in five years by the RBI with the last one occurring in May 2020. The FY26 real GDP Growth is projected at 6.7% for FY26, while the average CPI inflation is projected at 4.2%. The RBI MPC also considered the key reform policies announced in the Union Budget 2025, particularly the focus on fiscal consolidation.

Overall, RBI Governor Malhotra sounded more hawkish than expected and maintained a neutral stance. The market was expecting that at least RBI would endorse core CPI data as official levels of inflation targeting rather than headline CPI, often distorted by food and fuel. India’s headline CPI may not durably go below 4.0% in the near term due to various structural reasons despite RBI tightening for years. Thus RBI may not cut more than 50 bps in 2925.

India’s RBI has failed to bring down headline CPI even below 4.0% targets consistently despite ensuring higher borrowing costs. India’s food inflation has been running around 10% for the last two decades, resulting 5% average headline CPI. Also, India has a larger informal and black economy (corruption out of government money/projects and bank finances), which is making RBI tightening policy ineffective.

The need of the hour is low inflation/price stability as without price stability, no economy can function smoothly. In any way, if Indian headline CPI comes to around 5% consistently, then India’s real GDP growth should be targeted at a minimum of +10.00% rather than 6.5% to produce enough quality jobs for millions of educated youths; otherwise, there may be social unrest in the coming days and India may become a banana Republic.

Now India has to face Trump trade war tantrum 2.0 in the immediate future. On Friday, Wall Street Futures, UST, Gold, and Silver stumbled, while USD, and US bond yields surged on the renewed concern of an all-out Trump trade war 2.0 as Trump may now introduce reciprocal tariffs on trading countries/partners. On Friday, Trump signaled a potential escalation in trade tensions with India by threatening to impose reciprocal tariffs. He criticized India's high tariffs on American goods, highlighting instances where India imposes tariffs as high as 100% on certain U.S. products. Trump emphasized that under his administration, the U.S. would adopt a policy of matching the tariffs imposed by other countries, stating, "If they tax us, we tax them the same amount."

On late Friday, there was a report Trump told Republican lawmakers that he plans to announce reciprocal tariffs as early as Friday itself. Reciprocal tariffs on American imports are equal to the rates that trading partners impose on American exports. This stance reflects Trump's broader "America First" trade policy, aiming to address what he perceives as unfair trade practices by countries like India, Brazil, and China. He has previously criticized India's trade practices, including the removal of India's preferential trade status under the Generalized System of Preferences (GSP) program in 2019, which led to retaliatory tariffs by India on 28 U.S. products.

The potential for reciprocal tariffs could strain the growing economic relationship between the U.S. and India. Bilateral trade between the two nations exceeded $120 billion in FY24, with the U.S. being India's largest export destination. Analysts caution that a tariff war could impact ongoing economic and geopolitical cooperation, especially as India is a key strategic partner for the U.S. in counterbalancing China in the Indo-Pacific region.

Indian government departments, including the finance & commerce ministry, have begun "brainstorming" sessions to assess Trump's potential policies and prepare for the challenges expected after he assumes office on January 20. India is already under pressure from Trump’s bellicose comments and reducing its exorbitant tariffs on various US ‘sin’ products including Harley Davidson Motor Bikes before the Indian PM meets Trump in mid-February.

But as a policy, ‘Tariff King’ India has already rationalized its sky-high tariffs for the last two years or from the Trump 1.0 era keeping the interest of its own MSME sectors. India will rationalize/reduce tariffs not as a knee-jerk Trump reaction but will do it gradually over a period, ensuring fair competition and productivity of domestic manufacturers and also its fiscal implications. The Indian government has also to rationalize various policies on land, labor, and energy costs to lower input costs and be globally competitive.

India is planning to review import tariffs on over 30 items, including luxury cars and solar cells, after US pressure of Modi's visit to the US.  Easing entry for the likes of Tesla into India may hurt the prospects for the likes of M&M. Crude oil, nuclear reactors, and pearls are some of the other major imports from the US by India. At a White House press conference later on Friday Trump suggested that the reciprocal tariffs could come instead of the 10-20% universal import duty plan at the center of his economic message during the campaign.

The threat of reciprocal tariffs may also weigh on IT stocks like TCS, Infosys, and Wipro. More than half (56%) of India's software exports go to the US and Canada. Trump has recently taken action and made announcements regarding tariffs and trade. These actions include threatening to impose tariffs on imports from Canada, Mexico, and China, as well as discussing reciprocal tariffs with other countries.

The recent announcement by U.S. President Trump of a 25% tariff on all steel and aluminum imports, along with additional reciprocal tariffs, is poised to have significant repercussions for the Indian economy and its industries.

Immediate Market Reactions:

Stock Market Decline: Indian stock markets experienced a downturn, with the Nifty 50 index falling by 0.75% to 23,385.75. The metals sector was particularly affected, with companies like Tata Steel and JSW Steel seeing their shares decline by approximately 4% each.

Currency Depreciation: The Indian rupee reached a record low of 87.95 against the U.S. dollar (USD) due to concerns over the new U.S. tariffs. The RBI may have intervened by selling dollars through state-run banks to stabilize the currency, preventing it from breaching the 88 per dollar mark.

Sector-Specific Impacts:

Metals Industry: The imposed tariffs directly affect Indian steel and aluminum exports to the U.S., making them less competitive due to increased costs. This has led to a notable decline in the stock prices of major Indian metal companies.

Information Technology (IT): Beyond tariffs, the potential tightening of H-1B visa rules under Trump's administration could raise operational costs and limit growth for Indian IT firms, which rely heavily on U.S. clients. Over 80% of India's IT export earnings come from the U.S., making this sector particularly vulnerable.

Trade Relations and Policy Considerations:

Tariff Negotiations: In response to the U.S. tariffs, Indian Prime Minister Narendra Modi is considering reducing tariffs on electronic, medical, and surgical equipment, as well as certain chemicals, to boost American exports to India and prevent a potential trade dispute. Discussions of a mini-trade deal are also underway to avoid a trade war similar to that between the U.S. and China.

Trade Relations and Policy Considerations:

Tariff Negotiations: In response to the U.S. tariffs, Indian PM Modi is considering reducing tariffs on bikes, certain cars/EVs/Tesla, electronic, medical, and surgical equipment, as well as certain chemicals, to boost American exports to India and prevent a potential trade dispute. Discussions of a mini-trade deal are also underway to avoid a trade war similar to that between the U.S. and China.

Economic Reforms: To mitigate the adverse effects of the tariffs and strengthen the economy, experts suggest that India needs to implement bold economic reforms. These include structural changes in land and labor laws, easing business constraints, reducing protectionist duties, and enhancing worker skills to fully utilize India's young workforce.

Strategic Opportunities: While the tariffs present challenges, they also offer India an opportunity to align more closely with U.S. geopolitical goals. This alignment could expand India's role as an alternative supplier in sectors like electronics and pharmaceuticals, potentially leading to enhanced economic cooperation in critical areas such as defense and technology. Indian government should ensure a fair policy and cost environment so that Indian manufacturers and products can compete globally with the likes of China, Vietnam, and other key exporters.

In summary, President Trump's reciprocal tariffs are expected to have a multifaceted impact on the Indian economy, affecting various sectors and prompting both challenges and opportunities. Strategic policy responses and economic reforms will be crucial for India to navigate this evolving trade landscape.

Reciprocal Tariffs: Trump has threatened to impose reciprocal tariffs, meaning if India taxes US goods at a certain rate, the US will tax Indian goods at the same rate. He has criticized India's high tariffs on American products, sometimes as high as 100%.

Trump had previously threatened to impose a flat 10-20% universal tariff, and even 60-100% on China and other BRICS countries for ‘threatening’ USD, but recently had tasked his administration with studying that possibility as part of a broader trade review due by April. 1. On Friday, Trump said the tariffs would apply to every country, added that the announcement would likely come ‘Monday or Tuesday’ (next week).

The U.S. in many cases has lower tariffs than other countries for the same product, although Trump did not specify whether there would be exclusions to the new round of duties. Trump often cites higher tariffs imposed by foreign governments on automobiles, where the U.S. tariff is only 2.5%. As per the WTO data, the U.S. trade-weighted average tariff rate is about 2.2%, compared to 3% for China, 12% for India, 6.7% for Brazil, 5.1% for Vietnam and 2.7% for European Union countries.

During his election campaign, Trump said he would work with Congress to pass the Reciprocal Trade Act that would give him the authority to raise the tariff on a particular foreign good to the level imposed by that country: “Under the Trump Reciprocal Trade Act, other countries will have two choices — they’ll get rid of their tariffs on us, or they will pay us hundreds of billions of dollars, and the United States will make an absolute FORTUNE-- If India, China, or any other country hits us with a 100 or 200 percent tariff on American-made goods, we will hit them with the same tariff. In other words, 100 percent is 100 percent. If they charge us we charge them — an eye for an eye, a tariff for a tariff, same amount”.

Currently, exporters in nearly every country around the world face the same tariffs on their exports to the US, although the individual U.S. tariff rates vary depending on the product. Some tariff rates, like for cars, are low. Other tariff rates, like for clothing and shoes, are generally higher. The US President made this declaration during a meeting with Japan’s Prime Minister Shigeru Ishiba, Trump restated concerns related to trade imbalances, especially in the automotive sector. He underlined the differences as the European Union’s 10% tariff on auto imports in comparison to the US’s 2.5% rate. Moreover, he has also observed that countries like Brazil, India, and Vietnam enforce higher average tariffs on American goods, which he thinks has placed the US at an economic downside.

Trump told Republican lawmakers of his plans during budget discussions at the White House on Thursday. Trump and top aides have said they plan to use higher tariffs on imports to help pay for extending Trump's 2017 tax cuts, which independent budget analysts say could add trillions of dollars to the U.S. debt. Increased tariffs could offset some of that cost, though they have only accounted for about 2% of annual revenues in recent years.

Impact on Trade Balance: The U.S. is India's largest trading partner, and India has a trade surplus with the U.S. In FY24, India's exports to the US stood at $77.51 billion, while imports were $42.2 billion. The US is also the only major country/trading partner with which India has a trade surplus, making it a crucial source of US dollar earnings, thanks to India’s IT export service to the US.

Vulnerable Sectors: Key Indian exports such as pharmaceutical products, gems and jewelry, and marine products could be vulnerable to tariffs. Over 70% of India’s IT export revenue comes from the US, making India susceptible to changes in US trade policy, especially concerning H-1B visa norms.

Opportunities for India: The situation may present export opportunities for India as companies diversify their sourcing bases beyond China, Mexico, and Canada. India/Modi can leverage its diplomatic relations with the U.S./Trump to negotiate favorable trade terms.

Rupee (INR) Depreciation: Trump Tariffs can lead to fluctuations in currency markets, with a rising USD. A depreciating rupee could increase import costs for India, leading to inflationary pressures. However, it could also make Indian exports more competitive.

Investment and Economic Growth: Trade tensions could make local businesses cautious, potentially delaying investment decisions and slowing economic growth.

Specific Sector Impacts

Pharmaceuticals, Gems and Jewellery, and Marine Products: These are India's top goods exports to the US and could be particularly vulnerable to tariffs.

IT (tech) Sector: Given that over 70% of India's IT export revenue comes from the US, changes in American trade policy, especially concerning H-1B visas, could significantly impact this sector.

Steel and Aluminium: During his first term, Trump targeted Indian steel and aluminum exports along with China, Japan, South Korea, and even Turkey.

Overall Economic Implications

Inflation: Economists suggest that Trump's tariff policies could be inflationary, as businesses paying the tariffs are likely to pass the added costs on to consumers.

Trade War: Trump's stance on tariffs has previously led to global trade conflicts, such as with China, and a similar trade war with India could affect industries reliant on the Indian market, including IT services, pharmaceuticals, and agriculture.

Reduced Access: A potential across-the-board tariff on all items entering the US could hit overall demand for imported goods in the US.

Conclusions:

The market now expects the US/Trump to pressure India/Modi to align more with American interests. But India may prefer to be on its side, balancing its trade and strategic priorities without choosing between the US and China.

But now relation between Modi and Trump is not as good as we have seen during Trump 1.0; Modi may have miscalculated the probability of Trump 2.0 in his last US visit just before the US election and avoided calling/meeting Trump personally despite Trump's invitation. This, along with the Adani saga in the US, Modi may be on the back foot now, while Trump is flexing muscle by deporting illegal Indian immigrants in chained condition in a military aircraft. Unlike Colombian and Mexican Presidents, Modi was not able to register a strong protest and expressed eagerness to meet Trump in the US/WH this week. Modi’s weakness and spineless attitude towards the ill-treatment of illegal Indian immigrants show that Modi is ready to make a deal with Trump at any cost.

Market impact:

On Monday, Nifty slumped 0.76% to close around 22380 due to the Trump trade war on tariff King India, which has to withdraw decades of protectionist measures on domestic producers. Indian corporates are also a big source of political funding. But India has to pave the way for Musk & Co (Tesla, Satellite BB) and also various other US consumer brands freely into the Indian market.

Overall, Nifty is under stress despite the blockbuster Delhi election win by BJP as the proposed FY26 budget, income tax cuts and 25 bps rate cut by RBI may be too little and too late to stimulate the Indian economy. This along with Trump trade war tantrum 2.0, India’s export-heavy Nifty may continue to report subdued earnings growth in FY26 too. At around 930 projected EPS for FY25 and 22 average (fair PE), the fair valuation of Nifty may be around 18600, and even if we assume 15% growth in FY26 EPS to 1069, the fair valuation should be around 21400 against present levels of 22300.

Bottom line

Indian politicians and policymakers need to ensure proper policy to restore price stability of at least around 3% core CPI inflation and real GDP growth of around 8-10% on a sustainable basis for maximum inclusive quality employment to boost domestic consumption and Nifty earnings growth. India has to improve its productivity significantly along with price stability and double-digit growth to become a developed economy by the next 25-60 years. Nifty is under stress despite the blockbuster Delhi election win by BJP/Modi as the market may not now believe in Modinomics, unlike in past years. Modi has now an adequate political majority to unleash various policy reforms to make India great again. But Modi may not be so much interested in blockbuster reform despite growing political consolidation and blockbuster majority in the last ten years.

Technical trading levels: Nifty/India 50 Future/CFD

Whatever may be the fundamental narrative, technically Nifty Future/ India 50 CFD (23400) has to sustain over 23350 for any recovery to 23600/23850*-24000/24200-24400/24600 and a further rebound to 24700/25050-25200/254450* and further rally to 25650/26000-26200/26500 and 26650*/26800-27000/27200* in the coming days; otherwise sustaining below 24300, may again fall to 24150/24000-23750*/23550, and further fall to 23400/23250 and 23100/23000-22850/22700 and 22450/22150-21250/21000 in the coming days.