The recent conversation around US tariffs on India and then the flip-flop by President Trump has triggered a new wave of uncertainty in global trade dynamics. While the rollback signals a possible thaw in trade tensions, it also raises questions about future policy shifts and their ripple effect on investor confidence, bilateral trade relations and economic strategy. As markets adjust to the evolving landscape, it's worth exploring the potential impact this move could have on NRI investments and the broader financial ecosystem.

What are Tariffs

In simple terms, tariffs are taxes imposed on goods imported from other countries. The goal of tariffs is to encourage people to buy domestic products, but they come with consequences. Especially in today’s hyper-globalized world, national policies, particularly those from an economic superpower, are sure to cause ripples across borders.

Potential Impact

The direct impact of potential tariffs would be on steel, aluminium and pharmaceutical sectors. Nearly $14 billion worth of electronic products and over $9 billion worth of gems and jewellery are among the top areas that could be hit by US tariffs. While the 26% tariff announced on April 2 would not have applied to auto parts and aluminium products, those would have still attracted the 25% tariff that President Trump had announced earlier in the year. As of now, the reciprocal tariffs have been put on pause for 90 days, but the 10% tariff on all countries remains in effect. China, however, has received an increase in tariffs to 145% in response to China’s implementation of 84% retaliatory tariffs on the US. Despite the pause, it’s all hanging in the balance.

In essence, tariffs would make goods more expensive for American buyers. This may result in reduced demand, lower production in India, and decreased revenues for Indian exporters. Consequently, stock prices of affected companies may dip, creating widespread market volatility. Investors, especially foreign institutional investors (FIIs), may adopt a more conservative approach, tightening capital inflow resulting in increased market uncertainty.

The unpredictability could, in turn, have a trickle down effect on the Rupee. If Indian exports decline due to trade barriers, the trade deficit can widen, putting pressure on our currency. A weakening rupee may lead to higher import costs and inflationary pressure. In response, the Reserve Bank of India (RBI) may tighten monetary policy, thus raising interest rates, which could discourage borrowing and investment.

The uncertainty could also fuel inflation, resulting in reduced discretionary income, forcing many to dip into savings to maintain their standard of living. In dire times, many people shift focus from equity investments to safer options like fixed deposits or gold.

A Silver Lining?

But not all is lost. With the US imposing higher tariffs on China, India sees a long-term opportunity, especially with exports of iron and steel products. The tariff wars may also encourage companies to favor India over other emerging markets for manufacturing and potentially boosting FDI and job creation. However, these gains are long term and contingent on India's ability to improve its ease of doing business.

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