Trump tariffs on India: Can bank stocks shield Indian stock market from this blow? EXPLAINED

The sell-off in the Indian stock market deepened on Thursday, August 7, with both the Nifty 50 and Sensex dropping over 0.6% and slipping below key levels. Investor sentiment was dampened after U.S. President Donald Trump raised duties on Indian imports to 50%, triggering a sharp decline in major export-oriented sectors, including textiles, gems and jewellery, automobiles, and pharmaceuticals.

On Wednesday, Trump signed an executive order imposing an additional 25% tariff on Indian goods, citing India’s continued imports of Russian oil as the rationale. This hike is in addition to the 25% tariff announced last week, bringing the total U.S. duty on many Indian imports to 50%.

The initial 25% duty takes effect on August 7, with the second tranche to be implemented after 21 days. These levies are now the highest among major countries. Analysts believe Trump is using tariffs as a strategic tool to pressure New Delhi into cutting ties with Russia, including pausing crude oil imports and defence purchases.

Meanwhile, India’s Ministry of External Affairs strongly criticised the action, calling it “extremely unfortunate” that the US has chosen to penalise India for decisions that are similarly being made by several other countries in their own national interest.

The ministry called the move “unfair, unjustified, and unreasonable", adding that India will take all necessary measures to safeguard its national interests.

While analysts estimate that the tariff impact on the Indian economy is minimal, given that U.S. imports account for just 2% of India’s GDP, they warn that certain sectors such as textiles, pharmaceuticals, precious stones/metals, chemicals, metals, and petroleum products are likely to be affected, as these industries are heavily dependent on the U.S. market.

Although the overall economic impact is expected to be limited, analysts note that these tariffs come at a time when the Indian economy is attempting a recovery in the current fiscal year, after falling to a four-year low in FY25.

Both the central bank and the government have already taken various measures to revive growth. The RBI reduced the repo rate to 5.5% after a cumulative cut of 100 basis points and announced a surprise 100 basis point reduction in the CRR. The government, in the Union Budget, also implemented income tax cuts to boost urban consumption.

Meanwhile, stock market investors also seem to view the impact of the tariffs as limited, with Indian equities holding firm over the past week, supported by strength in banking stocks that helped prevent a major decline.

Banking stocks lend crucial support as broader markets stumble in July

Indian equities closed July on a weak note amid sustained foreign investor outflows and a lackluster start to the June quarter earnings season, which reignited concerns around stretched valuations. However, banking stocks provided some cushion to the broader market.

While the Nifty Bank index slipped 2.3%, it outperformed the Nifty 50, which fell nearly 3%, thanks to the relative strength in heavyweight private lenders like HDFC Bank and ICICI Bank. Both stocks hit multiple record highs during the month following the release of their Q1 results.

While foreign portfolio investors (FPIs) did sell banking stocks during the month, the extent of selling was limited compared to other sectors. FPIs withdrew $671 million from the banking space in July, but their overall share in the BFSI (banking, financial services, and insurance) sector remained steady at 31.6% by month-end, indicating continued long-term interest in the sector despite near-term concerns.

Can bank stocks continue to outperform?

Historically, during periods of geopolitical uncertainty and trade-related tensions, investors tend to shift their focus towards domestically driven sectors. Banking stocks, in particular, are often seen as a relatively safer bet in such times.

Dr. VK Vijayakumar, Chief Investment Strategist, Geojit Investments Limited, said, "The market is unlikely to panic, but weakness will continue in the near term. Since uncertainty is high, investors should be cautious in their approach. At least in the near term, export-oriented sectors will remain weak. Domestic consumption themes like banking and financials, telecom, hotels, cement, capital goods, and segments of automobiles will remain resilient."

Although the banking sector posted a mixed performance in the June quarter so far, with a few private banks reporting strong earnings, many public sector banks (PSBs) saw a dip in profitability as net interest margins (NIMs) came under pressure following repo rate cuts. 

Typically, when interest rates are lowered, banks are quick to pass on the benefits to borrowers through reduced lending rates. However, the adjustment in deposit rates tends to follow more gradually. This lag can temporarily compress margins in the June quarter, particularly in a falling interest rate environment.

Analysts anticipate a notable improvement in the performance of banks during the second half of FY26, led by easing credit costs and a gradual reduction in stress within the unsecured lending segment.

In its August monetary policy review, the Reserve Bank of India (RBI) significantly lowered its inflation forecasts for the second and third quarters of FY26, although it projected elevated inflation in the fourth quarter. This suggests that the central bank may have a limited window to implement further rate cuts. 

For the banking sector, this signals a positive development—as it alleviates concerns over continued margin compression (NIM pressure). A pause in rate cuts gives banks room to stabilise their margins, providing some relief to a sector still adjusting to the current monetary cycle.

Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.