On April 2, US President Donald Trump announcedsweeping reciprocal tariffs affecting the global trade landscape. His policy, referred to as ‘Liberation Day,’ introduced new tariff rates for over 180 countries, with no exclusions granted to any nation.

Additionally, a baseline tariff of 10% was imposed across the board. However, Trump’s reciprocal tariffs were set at only half the rate of those imposed by other countries on US exports. Despite this, the announcement unsettled financial markets, with Dow Jones Futures witnessing a sharp decline of over 1.5%.

India was among the countries affected, with Trump imposing a 26% tariff on Indian exports—half the rate that India levies on US imports. Furthermore, a 25% tariff on automobile imports into the US was also announced, potentially affecting major Indian auto manufacturers such as Tata Motors and Samvardhana Motherson.

Immediate Reaction and Market Sentiment

The immediate reaction to Trump’s tariff decision was a drop in Indian stock market indicators. The Gift Nifty index fell by 1.5%, reflecting investor concerns over the impact of higher tariffs on India’s trade and economic growth. While initial market sentiment was negative, experts suggest that the long-term impact may not be severe, as markets usually adjust to such policy changes over time.

Historically, India’s trade surplus with the US has not been substantial enough to trigger major economic disruptions. According to the India Brand Equity Foundation (IBEF), India recorded a trade surplus of $36.8 billion with the US in FY24. Indian exports to the US stood at $77.5 billion, while imports from the US were valued at $40.7 billion during the same period.

Additionally, the most vulnerable sectors account for only 1.1% of India’s GDP, indicating that the broader economy might remain relatively insulated from these tariff changes.

Sectoral Impact of the Tariffs

While the tariffs may not significantly impact India’s economy as a whole, certain sectors with high exposure to the US market could face disruptions. Analysts believe that industries such as IT, pharmaceuticals, automobiles, and electronics may experience selling pressure as higher tariffs reduce competitiveness in the US market.

According to a report by Motilal Oswal, India's top export categories to the US include:

• Electronics (15.6% of total exports to the US)
• Gems and jewelry (11.5%)
• Pharmaceuticals (11%)
• Machinery for nuclear reactors (8.1%)
• Refined petroleum products (5.5%)

Given these figures, Indian businesses in these sectors might see reduced export volumes or lower profitability due to increased costs imposed by the new tariffs.

Market Outlook and Potential Negotiations

Despite the initial negative reaction, financial experts believe there is room for negotiation between India and the US. Trump’s decision to impose tariffs at only half the rate applied by other countries suggests a willingness to engage in trade talks rather than adopt a strictly retaliatory stance.

VK Vijayakumar, Chief Investment Strategist at Geojit Investments Limited, noted that the 26% tariff on India is relatively moderate compared to the rates imposed on other countries such as China, Taiwan, Sri Lanka, and Bangladesh. He also highlighted the potential for a bilateral trade agreement that could lower these tariffs shortly.

Narinder Wadhwa, Managing Director & CEO of SKI Capital Services, pointed out that protectionist trade policies from the US tend to create global uncertainty. Foreign Portfolio Investors (FPIs) could respond by reducg their exposure to emerging markets like India, leading to increased volatility in the stock market. However, this volatility may be temporary, with investors gradually factoring in the impact of the new trade policies.

Balancing Risks and Opportunities

Trump’s tariff announcement has created short-term uncertainty in Indian markets, particularly for sectors with significant US exposure. However, the broader economic impact may be limited due to India’s relatively small trade surplus with the US. The possibility of bilateral trade negotiations offers hope that some of these tariffs could be revised or mitigated in the future.

While certain sectors may face immediate challenges, market experts believe that India’s overall economic growth trajectory will remain intact. Investors should brace for short-term market fluctuations but keep a long-term perspective, as negotiations between India and the US could shape a more favorable trade environment moving forward.