Nifty plunged on US-China reciprocal tariffs war; what’s next?

·       Although the Indian economy is not export-heavy, the US trade surplus and remittances are vital for India’s USD reserve; India has to cut tariffs to US levels

India’s benchmark stock index Nifty plunged almost 15% from October 2024 to February 2025. Nifty stumbled after scaling life time high of around 26450 in late September 2024. Nifty tumbled on muted earnings growth and the concern of a potential Trump tariff tantrum 2.0 as from October 2024, the odds of Trump’s election win began to increase dramatically contrary to earlier perceptions.

Overall, after a stupendous rally of almost 23% from India’s election result day (June 4, 2024) panic low of 21281 to 26277 in late September 2024, Nifty tumbled 15% to a low of 21964 by early March 2025. Nifty entered well into so-called technical correction territory (10% from the top) due to various reasons like tepid earnings growth, stretched valuation, India’s economic slowdown, elevated and sticky headline inflation, higher cost of living, weak labor market, subdued discretionary consumer spending, hawkish RBI and elevated borrowing costs for too long FPIs exodus and weakening local currency (INR).

The list goes on amid SEBI regulatory tightening for retail traders in FNO. Also, Trump trade war tantrum and weak global/US cues, the concern of Trumpcession in the US and synchronized global recession as a result of Trump’s policy uncertainty on tariffs, immigration, deportations, and regulations, and Tariff Man Trump’s consistent threat of reciprocal tariffs on Tariff King India dragged India’s Dalal Street. Under the Trump trade war tantrum, protectionist Indian domestic producers may face stiff competition from cheaper imports, having superior quality and brand value. And Indian exporters may also face Trump tariffs dilemma in the coming days.

But Nifty also made an impressive recovery of around 6% in March amid short covering and value buying from vital technical support zone on hopes & hypes of a less hawkish Trump trade war tantrum and RBI stance. Again Nifty stumbled almost 2% in the last two trading days since Trump’s Liberation Day Reciprocal Tariffs announcement on April 2, 2025, in line with US/global trend.

Wall Street as well as Dalal Street tumbled on Trump’s reciprocal tariffs tantrum.

On late Tuesday, April 2, 2025, US President Trump celebrated his Tariff Liberation Day and announced the much-awaited reciprocal tariffs. Trump first announced a 10% basic (minimum) tariff on all US imports. The market expected it as 20% and thus there was a risk trade briefly; Wall Street Futures surged. But soon stock futures stumbled after Trump announced the full list of additional reciprocal tariffs on virtually almost every other country of the world, starting from China at 34% (on top of existing 20-30%), the EU at 20%, Vietnam 44%, Japan 24%, India 26% and South Korea 25%

The overall weighted average of Trump’s reciprocal tariffs may be now around 25-30% on around $3.1 trillion of US merchandise imports annually. The 10% basic US import duty (tariff) will be applicable from 5th April 2025 on all US imports and additional country-specific ad valorem duty is scheduled to start from April 9, 2025. Overall, the reciprocal tariff average of 27.5% is much higher than the present rate of 2.5%; the market was also expecting the maximum rate of the reciprocal tariff as 20%.

If Trump’s reciprocal tariffs are applied at face value, the cost of imported goods into the US would rise by almost 25%. This in turn will result significantly higher cost of living, subdued discretionary consumer spending, economic slowdown, and higher unemployment, resulting in stagflation or even an all-out synchronized global economic slowdown/recession and GFC 2.0 (global financial crisis like in 2007-08). Thus financial/stock market on both sides of the Atlantic as well as the Pacific (America-Europe-Asia) tumbled.

In his Tariff Liberation Day April 2 speech; Trump clearly warned trading partners about retaliatory tariffs in response to his reciprocal tariffs. But on April 4, China hit back and announced significant retaliatory measures in response to President Trump's reciprocal tariffs. These actions mark a substantial intensification of the ongoing trade war between the US and China.

On April 2, 2025, Trump unveiled a sweeping tariff strategy, imposing a baseline 10% tariff on goods from all countries, with additional ‘reciprocal’ tariffs targeting specific trading partners based on perceived trade imbalances. For China, this included an additional 34% tariff on top of existing 20% duties, bringing the total tariff rate on Chinese imports to 54%, effective April 9, 2025. This move aligns closely with Trump’s campaign promise of a 60% tariff on Chinese goods and marks a significant escalation in the U.S.-China trade war. And if we combine China tariffs of 20-25% on an average imposed during Trump 1.0 and Biden Presidency period, overall tariffs may be around 75-80% on Chinese goods.

Besides slapping reciprocal retaliatory tariffs of 34% on US goods, China also hit the US with export restrictions of various crucial rare earth materials, without which it would be very difficult for the US to maintain its tech and military hardware in the long run. As an additional measure, China also added 11 American firms to its "unreliable entity list," restricting their ability to operate in China. Export controls were imposed on 16 U.S. companies to limit the shipment of dual-use items, including drone manufacturers.

The world's 2nd largest economy China is also the 2nd biggest market for various big US MNCs and any Chinese restrictions on them are also negative for their earnings and Wall Street overall. Dow Jones, often seen as the bellwether for the US and global stock market capitulated by more than 5000 points in a few days after Trump celebrated his Tariff Liberation Day on April 2 and imposed draconian reciprocal tariffs from 50% to 10% on almost 180 countries in the world including China.

At face value of Trump's present reciprocal tariffs plan. Americans may have to pay 25% additional tax or import duties on around $3 trillion worth of imported goods annually. This will inevitably push the cost of living for average Americans and may cause stagflation or even an all-out recession in the coming days. The US presently imports almost 50% of consumer and industrial goods including goods for daily use.

Although Trump's thought process about the legacy issue of US tariff disadvantage may be correct, his implementation strategy may not be correct.  After the Wall Street meltdown, Trump may be also blinking as he is offering a trade war truce with China by postponing the Tik-Tok deal deadline by another 75 days. Trump is open to offering trade concessions to China instead of helping Tik-Tok deal. But China is not ready to engage in childish negotiations. China wants serious trade negotiations with equal footing and mutual respect.

Trump may be seeking a universal tariff like 10% and an appropriate VAT or GST rate across the globe for a level playing field irrespective of the WTO narrative of developed or developing nations. Trump also wants free & fair trade across the globe without any targeted regulatory hurdles.  But most of the developing and even some developed nations and US allies are not so liberal and ready to give the US free & fair trade access. Thus Trump is now trying to pressure those countries through his reciprocal tariffs bellicose policy.

Although these Trump tariffs will be eventually borne by US importers and consumers, not exporters, they are wary of losing access to the $6 trillion goods consumption market in the US, which is a huge blow. Trump is now trying to use the huge US consumption market as leverage for the US access to free & fair global trade. High-tariff countries like India, and Vietnam are in touch with Trump admin for middle ground. The question is now who will blink first President Trump or Chinese President Xi?

By his draconian reciprocal tariffs, Trump is trying to address his narrative of US trade imbalances by imposing duties on imports from countries that levy higher tariffs and various targeted regulations on U.S. goods. For India, this translates to a 26% tariff on its exports to the US. In his April 2 Tariff Liberation Day announcement, Trump pointed out he is favoring India/Modi, a great friend of his by offering a 50% discount on reciprocal tariffs to only 26%, which is a peanut to what India charges exorbitantly on certain US products like motorcycles and certain other goods to the tune of 70-50% (after recent cuts).

Potential Impact of Trump’s Reciprocal Tariffs on India

Merchandise Export-Oriented Sectors at Risk:

·       India’s merchandise exports to the US were around $77 billion in FY24 led by electronics (16%), gems and jewelry (11%), pharmaceuticals (11%), machinery (8%), and refined petroleum (5%).

·       A 26% reciprocal tariff against the earlier 2.5% average could raise costs for US consumers substantially, potentially reducing the viability of these goods.

·       Initially, pharmaceuticals were seen as less disruptive, as they’ve been exempted from the tariffs; but later Trump clarified that he would soon bring an appropriate tariff on Pharmaceuticals to make America not dependent on any foreign supply chain.

Automobiles & accessories/parts (already under a 25% Section 232 tariff), textiles, and gems & jewelry with small exporters potentially losing market share to rivals from less-affected nations

Economic Growth (GDP) Effect

·       India’s exports to the U.S. could drop by around $4.5 billion in FY26, affecting real GDP growth by around 0.5%

·       The present trade surplus of around $37 billion with the US may reduce, boosting USDINR and also imported inflation, but may help in overall exports.

·       If trade tensions escalate into a full-blown trade war, foreign investor sentiment (especially US FDI and FPI) might weaken.

Potential BTA/FTA (Bilateral or Free Trade Agreement) with the US

India is negotiating a trade deal (BTA/FTA) with the US informally, which may take a concrete formal shape by September 2025. Although Indian officials are hoping this BTA talks with the US may soften or delay the implementation of Trump’s reciprocal tariffs blow, the Trump admin may be looking for similar 10% universal tariffs (including GST) BY India with no targeted regulatory hurdles for free & fair access of US goods in India, which is now aspiring for the 3rd largest economy on the world and a developed economy by 2047. Trump recently said the Indian PM and officials are very smart (in BTA negotiation) and although Modi is a great friend, Trump slammed India's high tariffs as ‘brutal’.

India may be offering itself as an alternative to the Chinese manufacturing hub.

India is now proposing slashing tariffs on $23 billion of US goods imports (like defense, energy, nuclear power plant equipment/boilers, and gems). India may be also trying to offer itself as an alternative to the Chinese manufacturing hub (China + One)  as US reciprocal tariffs imposed on it at 26% vs 34% in China (actual cumulative tariffs around 75% if we take into account 20% under Trump 2.0 and Trump1.0 + Biden).

Trump’s Reciprocal Tariffs and Global Trade Dynamics:

Trump’s tariffs, ranging from 10% (baseline) to 49% across 180 countries, risk sparking retaliatory measures, escalating into a global trade war. India’s relatively moderate 26% tariff—compared to Vietnam (46%) or Bangladesh (37%)—might make it less vulnerable, and competitive but a potential global economic slowdown could still affect Indian exports globally.

Potential Impact of Trump’s Reciprocal Tariffs on the Indian Stock Market

Negative impact: US Export-heavy sectors

·       Automobiles & related accessories/spare parts (e.g., Tata Motors, Motherson Sumi, Bajaj Auto)-already 25% imposed; Auto stocks might face headwinds from the existing 25% tariff, compounded by supply chain disruptions (moderate impact)

·       Pharmaceuticals (Generics/Branded) -although exempted at present, Trump may impose 15-25% tariffs in the coming days (high exposure & impact)-Sun Pharma, Lupin,

·       Textiles/Apparels-although there was some cheer as tariffs on Indian textiles at 26% will be less than Bangladesh’s 37%; Bangladesh is a major textile export hub for the US and Europe and is also often seen as a Chinese proxy; Indian MSME/EOUs have already suffered from the low margin (moderate exposure & impact)-KPR Mills, Welspun India.

·       Jewelry & diamonds- The U.S. is a major buyer of Indian gems/jewelry; high tariffs may affect affordability for ordinary Americans (high exposure & impact)-Titan.

·       Chemicals-Specialty chemicals may have a higher impact; but overall moderate exposure & impact.

·       Agro Products: Moderate exposure & impact in Tea, Coffee, rice, and rice exports (moderate exposure & impact)

·       Agriculture: India’s tariffs on U.S. agricultural goods average 39% (trade-weighted 65%), far exceeding the US’s 5%. Reciprocal tariffs could hit India’s food and farm exports hard. Exports like dairy products, fish, meat, and processed seafood will face significant tariff hikes, impacting their competitiveness.

·       Liquor, Meat, and Sugar: Products such as alcoholic beverages, meat, and sugar are also expected to be among the most affected by the new tariffs, potentially leading to decreased export volumes and revenue losses for Indian producers.

·       IT/Tech may also face regulatory headwinds including H1B visa and minimum US pay scale; presently many Indian IT professionals are working at almost 50% of the minimum US pay scale; Americans are not happy (high exposure & moderate impact)

Neutral impact: Domestic economy-focused firms could remain resilient, buoyed by strong local demand

·       Banks & Financials: Low impact, but maybe also affected indirectly due to potential impact in remittances and higher USDINR

·       FMCG: Domestic focused haven sector, but recently also under pressure amid India’s economic slowdown

·       Infra & Capital Goods: Solid prospect amid infra capex led by Federal and state governments

·       Oil Refinery products: Neutral direct impact as U.S. energy imports, including oil, gas, and refined products, have been exempted from these reciprocal tariffs (RIL, ONGC)

Limited Impact on the Indian economy and stock market (Nifty 50)

India is not an export-oriented economy and India’s trade surplus with the U.S. is only 1.1% of GDP. But India needs a US trade surplus of around $37 billion and also remittances from the US for its FX/USD reserve. The US is the only major trading partner, which has a significant trade surplus in favor of India. India also needs to maintain a good geopolitical and strategic relationship with India as a reliable friend and the biggest democracy in the world. The US is a favorite and dream destination for most of the Indian students, professionals, wealthy persons, and businessmen due to substandard levels of living in India and the country is also benefitting in terms of remittances from the US. High-tech Indian cities like Bengaluru, and Hyderabad are thriving on US outsourcing and investments.

Overall, India’s Nifty 50 also should be impacted by Trump’s reciprocal tariffs as most of the index heavyweights HDFC Banks, ICICI Banks, Axis Banks and RIL are not affected directly, but IT heavyweights like INFY, TCS, and some automakers like Tata Motors and Bajaj Auto is partially affected.

Conclusions

Trump’s bellicose policies and reciprocal tariffs may affect India’s export revenues to some extent and cause stock market volatility, particularly in U.S.-centric export sectors, but strategic responses and domestic resilience might limit the overall impact. The Indian market’s reaction will hinge on negotiation outcomes and global trade fallout, with a mix of short-term pain and potential long-term gains in play.

A 26% Trump tariff and higher USDINR could potentially reduce India's GDP by $30 billion, which is about 0.7% of India's projected $4.3 trillion nominal GDP for FY26. Key sectors like electronics, gems and jewelry, auto components, steel, aluminum and even pharma exports are likely to face significant challenges due to Trump’s reciprocal tariffs. The US is also demanding free & fair access to US agri goods into India, but Indian officials are vehemently opposing it as agri is also a politically sensitive issue for India and want to keep it out of any negotiation. Despite this, India and the US are actively negotiating a trade deal (BTA), which could mitigate some of the negative impacts and potentially boost bilateral trade to $500 billion by 2030

 The Trump admin may especially target sectors where India has trade surpluses, like pharma and IT services. Although services are typically out of tariffs, Trump has previously criticized U.S. outsourcing to India and often mocked Indian English accent in BPO/Call center. Trump policies could get stricter on H-1B visas or service-related trade, affecting big Indian techs like TCS, Infosys, and Wipro, having significant exposure in the US. India may also respond with its retaliatory tariffs, straining the bilateral trade relationship further. This may impact the US. Tech, defense, fossil fuel (oil & natural gas), nuclear energy and agriculture firms trying to expand in India. If trade tensions escalate into a full-blown trade war, foreign investor sentiment (especially U.S. FDI and FPI) might weaken.

India might try to negotiate exemptions or reciprocate diplomatically to avoid major disruptions. India may also cut tariffs and GST in response to Trump’s demand for at least US goods to avoid major trade and diplomatic tensions with the US, the world’s largest economy and dream destination of most Indians. Also, US companies may slow investment in India if diplomatic or trade tensions rise. India may also lose attractiveness as an alternative global supply chain hub if domestic protectionism grows.

India’s Services Exports to the US may be subject to various regulatory hurdles apart from any potential digital tax to force India to reduce its high tariffs on US goods. India consistently exports a significant amount of services to the U.S., estimated at around $28-30 billion annually in recent years, contributing to the total export figure. India's service exports to the United States are a critical component of their bilateral trade relationship, characterized by a strong emphasis on knowledge/skill-based and technology-driven sectors.

Technical view: Nifty Future

Whatever may be the fundamental narrative, technically Nifty Future (CMP: 22950) now has to sustain over 22850-22900 for a recovery to 23300/23500-23750/23950 and further rally to 24050/24200*-24400/24600 and a further 24700/25050-25200/25450* and 25650/26000-26200/26500 and 26650*/26800-27000/27200* in the coming days; otherwise sustaining below 22800, it may further fall to 22400/22200-22000/21800* and further  21500/21200-20900/20450 and even 19800/19600-17650/16700 in the coming days.