The US President implemented reciprocal tariffs on its trading partners who have large trade deficits with the US. These new tariffs are significantly higher than anticipated and the highest in over a century. These changes not only alter the global trading landscape but also bring about a lot of uncertainty to the markets.
The
key highlights are as below:
- The
reciprocal tariff plan introduces a minimum baseline tariff of 10% on all
countries with additional tariffs of up to 49% for 60 countries. US imposed an average additional 34%
tariff on Chinese imports and 20% on imports from the European Union
- The US
has imposed a broad 26% tariff on exports from India, effective midnight
on April 5.
- Earlier
also, the US had imposed a 25% tariff on non-US auto and non-US specified
auto parts such as engines, transmissions, powertrain parts, and
electrical components as per Executive Order dated 26 March 2025, with
effect from 3 April 2025.
- Also,
a tariff of 25% has been levied on all Steel and Aluminum imports in the
US from all countries including India with effect from 12 March 2025.
- The
imports from India will bear an additional 27% tariff over and above the
current tariff levied by the US, while it is 34% for imports from China
and 46% duty on imports from Vietnam as per the Executive Order of 2 April
2025. On imports from Mexico and Canada, the US levies 25% duty rate.
India has a competitive advantage of 7% and 19% compared to China and
Vietnam, respectively. However, most of the products imported from Canada
and Mexico into the US are exempt under United States-Mexico-Canada Agreement
(USMCA), which puts Mexico and Canada in an advantageous position compared
to India.
- While
the direct impact of tariffs on India is limited, there could be cascading
effects due to similar tariffs imposed on other countries.
- New US
administration expects the tariffs to raise about US$ 600 billion per
year.
- Expected
increase in revenue would be equivalent to a 2%-3% tax on total
consumption of goods and services.
- Large
tariff rates will hit only a small share of overall US consumption as
imports are a very small share of US GDP.
- Tariffs
could pose upside risks to US inflation, albeit as a temporary shock of
1.25-1.50%]
- Risks
to US Treasury yields appear to be to the upside.
Summary
of impact of key sector goods exported from India to USA.
01. Pharma sector : There has been no major impact for the Indian
pharma sector as the sector has been given exemption under the Executive Order
Annexure II released on 2 April 2025.
02. Passenger
Cars and Light Trucks : India's exports to the US are negligible, hence this
sector is not in focus from the tariff perspective as of now.
03. Auto Parts : The 25% duty has been imposed on all
countries, and there has been no duty arbitrage for India compared to Asian
countries like China. As a result, this sector may face challenges in exporting
goods. Therefore, the Indian government should seek a concessional rate when
entering into a Bilateral Trade Agreement (BTA) with the US.
04. Textile : Although tariffs have been
increased by 27%, raising challenges and costs for the Indian textile sector,
India still has an advantage as countries like China, Vietnam, and Bangladesh
face even higher tariffs than India.
05. Telecom: There has been no major impact
for the Indian pharma sector as the sector has been given exemption under the
Executive Order Annexure II released on 2 April 2025
06. Gems & Jewelry : Although tariffs have been increased, raising
challenges and costs for the Gems and Jewelry sector, India still has an
advantage as countries like China face even higher tariffs than India however,
due to USMCA, Canada and Mexico get a competitive advantage over India.
07. Oil & Gas : India is not the
exporter of Oil & Gas to USA & hence not impact.
08. Agriculture: The agriculture sector is facing
significantly high tariffs, creating challenges for growth and competitiveness.
Further, Due to USMCA, Canada and Mexico get a competitive advantage over
India.
09. IT & other service sector: The
Tariff is on goods and not on services so no direct impact. However due to
inflation, other sectors might tighten budgets, which could slow IT spending or
delay projects.
10. Exempted Sectors: Essential minerals,
metals, pharmaceuticals, specified chemicals, and semiconductors are exempt.
Here's
a quick take on how this trade shock could ripple through India’s debt,
equity, and forex markets—and what investors should be watching.
🔸 Debt Market: RBI Could Soften Its
Stance
With
export-driven sectors likely to lose steam, the RBI may pivot toward rate
cuts to support growth. This could:
- Push government
bond yields lower
- Trigger
foreign inflows into Indian debt as global investors seek yield in
stable markets
- However,
a wider fiscal deficit is a risk if the government ramps up
spending to offset external shocks
Investor
Angle: In this
environment of uncertainty, short and medium-duration investments could be
considered to offer optimum risk-reward opportunities .Watch for RBI commentary
in upcoming policy meets.
🔸 Equity Market: Brace for Sectoral
Shake-Up
The
direct economic drag from tariffs is likely to be limited, given the domestic
nature of India's growth drivers however , a "risk-off" sentiment in
global equities could spill over into Indian markets. Further,
- Global
risk-off sentiment could accelerate FII outflows
- Volatility
is likely to remain elevated in the near term
Investor Angle: Given current global uncertainties and
market dispersion, a diversified approach is prudent and use pullbacks to
accumulate quality stocks.
🔸 Forex Market: Rupee Under Pressure
The
INR is already showing signs of weakness, and the reasons are stacking up:
- Stronger
dollar as capital
flees to safety
- Widening
trade gap as
exports to the US face higher barriers
- RBI
intervention is
expected if volatility spikes, especially to contain imported inflation
Investor
Angle: Hedging FX
exposure could be prudent. Exporters may face short-term headwinds.
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