In charts: Trump tariffs-led external risks keep brewing troubles for India
Global trends, particularly the trade uncertainty triggered by US President Donald Trump’s tariffs, continued to weigh on sentiment in September. In October, however, the intensity of those jitters has eased.
The Indian economy stumbled in August, hit by the US’s additional 25% tariffs on top of the 25% reciprocal levy, as external risks weighed on domestic momentum through a weakening rupee, sliding stock market, and slowing exports.
The uncertainty and risks associated with shifting global trends continued to have an impact in September and so far in October, but the magnitude of the jitters was significantly less. However, the worst may not be over yet, even as the Indian economy is expected to hold well, benefiting from the goods and services tax (GST) revamp.
Rupee rout
The Indian rupee has become the worst-performing Asian currency this year, particularly in August, when additional tariffs eroded India’s trade advantage among its emerging market peers. This prompted a 1.6% month-on-month depreciation against the US dollar in August, while the central bank intervention helped reduce volatility. However, while the rupee may have hit new lows several times after August, data shows that the magnitude of the decline was nearly half, at around 0.8% in September, and even smaller at 0.4% in the first few days of October.
While the RBI holds $700 billion forex buffer to support the rupee, the focus would be on reducing volatility, rather than arresting depreciation. “India’s relative loss of export competitiveness vs EM Asia, amid higher tariffs, and especially now with services coming in the trade war ambit, would, in principle, warrant some adjustment via a weaker currency," Emkay Global said in a note last week.
Sujan Hajra, chief economist at Anand Rathi Group, said there are signs that the government may have deliberately allowed the rupee to depreciate to keep Indian exports competitive.
Market pulse
The Indian stock market performance has been under strain in most months in the past year, with a significant hit taken in August. A Mint analysis of stock market capitalization data shows that it declined 2.1% month-on-month, marking the biggest decline since February. A combination of global and domestic factors has been responsible for this trend, with the most prominent among them being foreign portfolio investor (FPI) outflows. While the stock market has recovered from the August slump, with m-cap rising 0.5% month-on-month in September, India has continued to lag behind its EM peers. In comparison, China gained 5.9%, Brazil 5.4%, and Thailand 3.9%, among others.
Ever since the Chinese government announced an economic stimulus to support the economy, investors have poured money into the market, dampening India’s chances. However, the sell-off in August has made way for a recovery in stock markets, supported by a potential increase in domestic demand. “Near-term sentiment remains constructive, though selective, as investors weigh global uncertainties against supportive domestic fundamentals," Hajra said.
Fleeing investors
The situation remains stressful as foreign investors continue to flee India—FPIs remained net sellers in October, withdrawing ₹5,427 crore from Indian equities in the first six days of the month. This follows ₹23,885 crore worth of withdrawal in September and ₹34,993 crore in August. In fact, India has seen FPI outflows in most months this year, with total outflows in seven of the 10 months totalling close to ₹2 trillion.
According to economists sharp valuation premium of Indian equities relative to other emerging markets is a key concern, with a weakening rupee and high US tariffs turning investors cautious. The US’s decision to disincentivize new H-1B visas also weighed on FPIs, as it is likely to impact India’s IT sector. Another factor at play is China’s influence. “FPI flows to emerging markets have picked up, but India has suffered outflows for idiosyncratic reasons—China has been a key beneficiary, and flows to India tend to be weak in such episodes," said Abhishek Upadhyay, senior economist at ICICI Securities PD.
Future tense?
The Reserve Bank of India (RBI) and the government have taken a series of steps to offer a domestic buffer to the economy against external shocks. While these could continue to offset some of the risks, the global uncertainty induced by the world’s largest economy could keep New Delhi under pressure and investors nervous. “While domestic factors largely drive the Indian economy, its exposure to advanced economies through trade and capital flows is increasing its short-term vulnerability to global economic disruptions," said S&P Global in a September report.
Moreover, the sharp rise in global uncertainty due to the US’s rapidly changing policies risks delaying private investment and adding volatility to the capital flows, financial market and exchange rates. While the fiscal year is expected to end with a 6.8% gross domestic product (GDP) growth, which will be the fastest among India’s major emerging market (EM) peers, the exposure to global risks, particularly the US’s policies, may keep the country on its toes.
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