Global markets are once again feeling the tremors of the Trump Tariffs, and India, like many other nations, is closely monitoring the situation. However, there may be a silver lining for the Indian economy. Prashant Jain, the Founder and Chief Investment Officer at 3P, forecasts that the tariffs will have a minimal impact, especially as lower crude prices and declining U.S. bond yields could benefit India.
Minimal Impact on India’s Economy
In his analysis for fiscal year 2026, Jain expressed that the repercussions of the U.S. tariffs on India’s economy and markets are likely to be marginal. He stated, “The overall effect of the tariffs is expected to be limited. In the long run, India might even find advantages. The recent dip in crude oil prices—from $75 to $60 per barrel—along with a decrease in U.S. 10-year yields from 4.4% to 4% is favorable for India.” Nonetheless, he cautioned that the uncertainty created by these tariffs and potential reactions from other countries could hinder business investments and economic growth.
Sector-Specific Insights
A report from 3P highlighted that most sectors within India remain largely unaffected by these tariffs. Key sectors such as:
- Banks
- Consumer Goods
- Construction & Engineering
- Energy
- Financial Services
- Pharmaceuticals
- Telecom
These collectively represent approximately 80% of the Nifty index, thus insulating the economy from significant fallout. While automakers like Tata Motors may face some challenges, most other auto manufacturers are not directly impacted.
Tech Sector Challenges
However, the technology sector could experience secondary effects. Jain remarked, “Although the IT sector is not directly influenced, it could face challenges if tariffs contribute to a weakened U.S. economy, potentially reducing demand for Indian IT services.” The situation for pharmaceuticals remains uncertain, necessitating close monitoring.
Small and Mid-Caps: Caution Advised
The investment team at 3P noted that the recent market correction stemmed from inflated valuations, high earnings expectations, and significant equity supply from both capital raising and Foreign Institutional Investor (FII) selling. Small and mid-cap stocks experienced the most significant declines due to their inflated valuations.
- Nifty corrected by 10%
- Nifty Midcap 150 dropped by 15%
- Nifty Smallcap 250 saw a 19% decline
Jain pointed out that nearly 48% of small and mid-cap stocks have plummeted by more than 20%. Despite this downturn, the risk-reward ratio for these stocks remains unfavorable, particularly when compared to large-cap stocks.
Favorable Large-Cap Valuations
Currently, the Nifty index trades at 18 times FY27 earnings, presenting a compelling risk-reward scenario for large-cap stocks over the medium to long term. Jain noted that this valuation level supports 10-12% earnings growth, especially as India’s cost of capital declines. Moreover, the narrowing gap between bond yields and earnings yield enhances the attractiveness of large-cap investments.
Positive Market Outlook
Jain’s observations suggest that historical trends show a correlation between dollar appreciation and emerging market performance. He noted, “The recent movements in the Dollar Index, along with FII outflows and market corrections since October 2024, resemble past patterns.” This leads him to believe that the current market phase is temporary and that improvements are on the horizon.
In conclusion, while the Trump Tariffs introduce a degree of uncertainty, the overall outlook for India’s economy remains cautiously optimistic, particularly for large-cap stocks. By keeping a close eye on these developments, investors can strategically position themselves for potential opportunities ahead.
