Do it yourself

What made traders’ life tough

·         The external environment has been volatile. Geopolitical conflicts in the Middle East had escalated materially. The war between Russia and Ukraine continued and developed a new trade/tariff angle for the Indian economy. India engaged with Pakistan in a small but intense war that could have serious long-term repercussions for regional geopolitics. These events caused sharp volatility in the market, causing exacerbated margin calls and losses to the traders.

·         The US imposed reciprocal (25%) and penal (25%) tariffs on imports of merchandise from India, making Indian exports to the US significantly uncompetitive in comparison to the traditional competitors like Vietnam, Bangladesh, Sri Lanka, Turkey, Indonesia, Ecuador, etc. This led to a sharp correction in the stocks of companies drawing material export revenues from the US.

·         Economic growth of India has been stable but no acceleration is seen. The demand (both consumption and investment) has remained subdued, impacting consumer companies that were over owned by traders and investors alike.

·         Earning momentum has stalled for the past few quarters, with earnings growing in single or low double digits. The valuations of several popular and fancied sectors and stocks have witnessed some de-rating, but still continue to be in the realm of “questionable” for a large majority of stocks.

·         While the implied volatility (VIX) has remained low, the realized volatility experienced by the traders has been elevated. Also, sector rotation has been swift and painful. Stocks from sectors like IT services, Pharma, FMCG, Realty and smallcap that were doing well couple of years ago and were over owned have noticeably underperformed YTD2025. While sectors like Auto, Metals and financial services that were under owned and performed poorly have outperformed.

What worked for the traders

International equities, precious metals and crypto assets have done exceedingly well YTD2025. Traders who had invested enthusiastically in Asian equities (especially greater China) a few years ago and were suffering losses have managed to recoup most of their losses. Crypto assets have provided phenomenal return, while gold and silver have also fared very well.

·         Internationally, the worst performing markets in the Post Covid period, especially, China, Hongkong, and Japan, have been top performing markets in the past one year. While India has been one of the most notable underperformers. In USD terms, India has yielded a negative return of ~5% in the past twelve months.

·         Precious metal and crypto assets have done exceedingly well for Indian investors and traders in the past twelve months.

In my view, assimilating the impact of a sustained Indo-US trade standoff in a personal investment strategy is an extremely complicated task, for three reasons – (i) Indo-US relations are very deep and wide; (ii) Indo-US trade relations go much beyond import and export of goods and service; (iii) Indo-US trade relations are intricately intertwined with strategic, geopolitical and social relations.

Hence, the impact of a prolonged standoff in the trade relations may not be confined merely to a couple of thousand Indian exporters, having a material exposure to US markets. In my view, a noticeable impact could be felt at economic, political, geopolitical, and financial levels.

As of this morning, we do not know about the progress in back-channel negotiations. But visibly both the sides appear to have hardened their stance. India has outrightly rejected the reasons cited by the US administration for imposing penal tariffs, viz., purchase of crude oil from Russia, as unreasonable and completely untenable. The US President has extended the tariff moratorium for China (the largest buyer of Russian oil) by another 90 days. He is attending a meeting with the Russian president tomorrow. In my view, this is indicative of a different design behind these tariffs, rather than the stated one (also read Tariff Tantrums).

I hope that a sense will prevail and the Indo-US relations get normalized soon. Would be even better if this normalization of relations is part of a larger global resolution, in which the US and other major trade partners like China, Russia, Japan, and EU also come to a sustainable agreement. This could usher a new phase of global economic growth, in which India could be a meaningful partner.

However, if parochialism, hyper nationalism and/or vested business interests override the spirit of cooperation and globalization, and a broad-based resolution is denied, India faces economic and geopolitical challenges that would require material policy changes, including foreign, trade, fiscal and monetary policies.

If I were to imagine a worst-case scenario in Indo-US relations, I would draw a picture using the following colors and shapes.

·         The US maintains penal tariffs, or even increases it further. The US businesses find it unviable to import from the Indian vendors. For generic goods and commodities, they shift to alternative sources (partially or fully) in the next 6-9 months. For specialized goods like specialty chemicals, auto components, pharmaceuticals, polished precious stone and jewelry, etc. the US importers may adopt a India+1 strategy. They may focus on developing alternative suppliers over the next 1-2 years and shift a part of their sourcing to such alternative vendors.

·         The US administration brings services and remittances also within the ambit of tariff/taxation. More non-tariff restrictions are (VISA, qualifications, numbers, minimum pay etc.) also imposed on Indian workers and students. This might force more Indian companies to establish onshore entities in the US and increase local hiring. Alternatively, some Indian companies may choose to establish entities in the foreign jurisdictions with favorable terms of trade with the US.

·         The US may restrict technology transfer to India by the US entities, hampering the growth of the manufacturing sector and R&D initiatives.

·         The US may increase strategic engagement with the neighbors of India, especially the hostile neighbors like Pakistan and Bangladesh, to put geopolitical pressures and keep the borders insecure.

·         The US may also incentivize/pressurize its close allies to review their relationships with India.

·         The US administration may sanction certain Indian entities on the pretext of criminal activities, supporting war, unethical business practices etc., particularly impacting their global business and financing deals.

·         The global economy also suffers, as the Political instability and unpredictable economic policies in the U.S., erodes confidence in the US economy and financial system. The foreign capital begins to move out of the US, causing sharp volatility and decline in the US asset prices, pressing the USD lower and bond yields higher, and a potential stagflationary condition.

·         Several Indian MSME's face severe financial stress as they lose their US business. Some of them fail to survive as they are unable to develop alternative markets in time. Many downsize their operations. Several medium and large businesses establish overseas entities with a local employee base. Unemployment rises. There is some incremental stress on the financial system. Consumption suffers. Realty demand falls. Government faces fiscal pressures as growth declines and the deflationary trend strengthens.

If I close my eyes and visualize this picture, it frightens me to the core. If I try to assimilate even a part of this to my investment strategy, I would end up holding almost zero risk asset (equity). I would therefore refrain from any such exercise.  

If you ask me “whether this worst-case scenario is possible?”, I would say “yes”. If you ask me what is the probability of this occurring, I would say “very low” but not “zero”.

I would like to believe that a broader global trade agreement may happen in the next 3-5 months, and Indo-US trade relations normalized to pre 2025 level, at least. In the meantime, I would, however, rationalize my portfolio to reduce the weightage of smallcap companies having over 20% revenue exposure to the US. In the mid and large cap space, I would only review the companies with over 20% revenue exposure to the US, provided they have significant debt on their books and are trading at a premium valuation (more than 20% premium to their long-term average valuation).

Also read

Strategy review in light of the US tariffs

Strategy review in light of the US tariffs - 2

Tariff Tantrums

New chapter in Indo-US relations

Speculating Trump’s second term

Ambivalent

To assess the impact of the latest changes in tariffs on the Indian exports to the US, on investment strategy and make suitable changes to minimize the adverse impact on investment portfolios, it is important to understand the dimensions of the Indo-US trade, its elasticity to tariffs, and sustainability of tariffs on various merchandise. Given the southward sloping trajectory of the Indo-US strategic relations since 2018, it may also be relevant to speculate a worst-case scenario; and find ways to assimilate that into investment strategy.

Dimensions of Indo-US trade

(Important note: The figures given in the following discussions have been taken from various sources, including the WTO, US trade department and India’s department of commerce. At various places these are reported either for calendar year or financial year. In some cases, these are provisional numbers. There could be some mismatch in terms of CIF and FoB reporting. Besides, I have rounded off numbers for convenience at many places. So please consider these data and pointers just for assessing a broader trend and not for doing any precise analysis. I would also not completely rule out any error in the figures. Readers may want to cross check where numbers appear incongruent.)

The US accounts for one fourth of India’s total exports

The US has been a key trading partner of India in the past three decades. Exports to the US account for more than one fourth of the India’s total

·         In 2024, India exported goods worth US$87.3bn to the US; and it imported goods worth US$41.5bn from the US.

·         India exported services worth US$41.6bn to the US, and imported services worth US$41.8bn from the US.

·         India had an annual trade surplus with the US of appx US$45bn.

·         Overall, in FY25, India exported goods and services worth US$821bn, and exported goods and services worth US$915.2bn. In this merchandise export were US$437.4bn, and merchandise imports were US$720.2bn

·         The exports to the US constituted ~26% of India’s total exports. However, merchandise exports were slightly less at 20% of the total merchandise exports.

Pharma a key export for India, not so for the US

·         Pharmaceuticals are a major part (US$11bn or ~12% of the total merchandise export to the US in FY24) of the Indian exports to the US.

·         The US accounts for almost one third of India’s total pharmaceutical exports (FY24-US$31bn). Overall, the US imports pharmaceutical products worth US$180bn annually. Imports from India are thus ~6% of the total pharmaceutical imports. Ireland (28%) and Germany (21%) are major sources of pharmaceutical imports into the US.

·         Pharmaceutical products are presently not subject to the reciprocal and penal tariffs announced by the US administration, effective from 07^th August and 27^th August 2025 respectively.

Precious metals, Engineering goods and Petroleum products are top exports

·         In 2024, India exported US$9.2bn worth of precious stones & metals (~10% of total goods exported to the US), US$12.3bn worth of electrical machinery & equipment (~14%), US$11bn worth of petroleum products (~13%) and US$6.7bn worth of nuclear reactors, boiler, and machinery (~7.5%; exempt from the latest tariffs presently).

·         Export of Textile, Apparels, etc. was appx US$5.2bn (6%).

·         Telecom instruments/electrical parts worth US$2.2bn (2.5%) were exported.

Important to note that a lot of export from India to the US is done using imported raw material. A significant part of gems, precious metal, petroleum products, telecom equipment etc. is re-export of imported inputs after some value addition. Total value addition in these goods is much less as compared to textiles, carpets, pharmaceuticals etc. So, the net economic effect of slowdown in low value addition exports (almost 30% of the total exports to the US) may be much less.

The following is a summary of assessment study on India’s key exports.

High risk of loss in competitive edge

Electrical machinery & equipment — Highly price-sensitive, intense competition from China, Vietnam, Mexico; Indian exporters would lose market share quickly.

Apparel & textiles — Margins are thin, heavy competition from Bangladesh, Vietnam; high tariff would wipe out price competitiveness.

Articles of iron or steel — US can source from South Korea, Mexico, Turkey; India would see sharp volume declines.

Organic chemicals — Competitive global supply from China & Germany; would lose share unless specialized grades.

Medium risk — partial substitution possible

Machinery & mechanical appliances — Some niche segments less replaceable, but mainstream machinery will shift to other suppliers.

Optical/medical instruments — US has domestic production and EU/Japan suppliers; tariffs would hurt Indian share.

Low risk — possible tariff pass-through

Pharmaceuticals — US dependent on India for generics & APIs; short-term volumes unlikely to fall sharply, though margins may compress.

Precious stones/metals — Price elasticity lower; India could pass part of tariffs to US buyers due to skill-based competitive edge.

Mineral fuels — Mostly re-exports/refining trade; US can diversify but switching costs high for certain grades.

Items where US is significantly dependent on India

(High potential to pass on tariffs without major volume loss)

Generic pharmaceuticals & bulk drugs — India supplies 30–40% of US generic prescriptions.

Cut & polished diamonds — India processes ~90% of the world’s diamonds by volume.

Certain specialty chemicals & dyes — Limited alternative suppliers at scale.

 Scenario analysis​

For many Indian MSMEs — particularly in textiles, leather goods, handicrafts, small engineering components, jewelry, and carpets — the US is not just a large market; it’s often the largest, sometimes contributing 30–70% of annual revenues.

Until now, Indian exporters benefited from relatively low MFN tariffs, often 2–6% lower than competitors. The new tariff wipes out this edge, pushing landed prices above those from Vietnam, Bangladesh, or Mexico — in some cases by 10–15%.

For price-sensitive segments, that is an existential threat.

…to continue tomorrow

Also read

Strategy review in light of the US tariffs

New chapter in Indo-US relations

Speculating Trump’s second term

Ambivalent

This level of tariff is indubitably concerning, as it makes numerous Indian MSME businesses, especially those exporting textile, leather goods, small components, jewelry, carpets etc., incompetitive; and in many cases poses an existential threat to the exporting entities. For several MSME the US market contributes a substantial part of their revenue; and these entities were enjoying some advantage over competitors due to lower MFN tariffs. They not only lose this advantage, but become materially incompetitive due to these tariffs.

These reciprocal and penal tariffs, in my view, tantamount to covert economic sanctions on India by the US. The reason cited for the penal tariffs is continued import of crude oil by Indian oil companies from Russia. The Indian government has clearly communicated to the US administration that this reason is not valid, as several other countries, including the EU, which also import crude from Russia are not subject to penal tariffs.

The situation is still evolving as the trade negotiations with the US are still under way, and these high tariffs are not permanent as of now. Nonetheless, the probability of these tariffs staying for a longer term is not zero. It is therefore important for everyone, including businesses, policymakers, and investors, to script a worse-case scenario for themselves and test their preparedness for such a scenario.

Notably, the present tariff action of the US administration is neither a surprise nor an isolated act of aggression against India. In the past 7-8 years there has been a pattern in the evolution of Indo-US relationships. Particularly since 2018, the US administration has been actively looking to base the mutual relationship on equality. President Trump seeking to rebase the relationship seeking full reciprocity from India on key economic, trade and technology issues is just a continuation of the evolving pattern. (Read more on this New chapter in Indo-US relations).

It is also pertinent to note that since 2018, the US has withdrawn the benefits under Generalized System of Preferences (GSP); materially tightened scrutiny on Indian IT and pharma compliance; persistently stalled progress on a bilateral trade deal; virtually downgraded the diplomatic status through exceptional delay in appointing an Ambassador to India (Indian mission of the US headed by an interim Chargé d'affaires during January 2021-March 2023 and January 2025 till present day; see details) and causing inordinate delays in grant of VISA appointments to Indians; disgracefully deported illegal Indian immigrants. These are some of the pointers towards the evolving pattern of Indo-US relations since 2018. The tariff spike is simply an extension of this pattern.

Some entrepreneurs, politicians, investors and thought leaders have called for a 1991 (balance of payment crisis) and 1998 like (economic sanctions post nuclear test) response to the situation. They have suggested that the government should use this opportunity to initiate some major reforms, like 1991 and 1998, to further strengthen the resilience of the Indian economy. Many of them see the current situation equivalent to economic sanction (through trade route) and suggest an appropriate response accordingly.

In my view, the Indian economy urgently needs several major reforms, regardless of the outcome of the present trade conflict with the US. The current situation does provide a catalyst and a valid excuse to implement these reforms that may cause some short-term pain to various stakeholders.

In the next few posts, I shall discuss my thoughts on the areas that need urgent reforms and changes, if any, required in the investment strategy in light of the latest US tariffs. Before that it is important to take note of the 1998 crisis, and how the situation in 2025 may be different.

Operation Shakti triggered global sanctions on India

India had maintained a policy of nuclear ambiguity since its first nuclear test in 1974 (Smiling Buddha). Over the years, global non-proliferation efforts intensified, particularly after the Cold War. On May 11 and 13, 1998, India conducted five underground nuclear tests in Pokhran, Rajasthan, codenamed Operation Shakti.

Operation Shakti, triggered a wave of economic sanctions from the US, Japan, Canada, the EU, and international financial institutions like World Bank, IMF and ADB. Notably, Russia, France, and Israel did not participate in sanctions. China issued strong condemnation but refrained from economic penalties.

Under the sanction, most of the non-humanitarian financial aid was suspended. Export of military and dual use technology to India was banned. All defense cooperation and technology transfer treaties were suspended. A freeze was put on loan guarantees and financial assistance. Lending to India by the World Bank, IMF, and ADB temporarily halted/slowed.

The extant government decided to take the global pressure head-on. It steadfastly refused to sign the Comprehensive Test Ban Treaty (CTBT) under pressure. The government also launched an aggressive diplomatic campaign to explain its position, emphasizing strategic necessity and national security concerns. Most importantly, the government unleashed several structural reforms to strengthen the domestic economy. Notably, the government divested its monopoly over core sectors like coal, power, telecom, oil & gas, civil aviation, etc. An ambitious national highway development plan (NHDP) was launched. Several fiscal incentives were provided to promote exports. A special economic zone (SEZ) policy was implemented. Several tax and other concessions were offered to the ITeS sector.

Consequently, the impact of the sanction remained contained. Reforms attracted material private capital flows from global investors. Turbulence in the market was short lived, and within a year the market scaled new highs. Sensex rose from ~3,300 in Jan 1999 to ~5,100 by March 2000, a jump of 50% in 15months.

Overall, the impact of sanctions was marginal.

The sanctions were lifted within two years as India materially helped the world in managing the Y2K crisis; unilaterally announced a “no first use” nuclear doctrine.

Situation in 2025 is different from 1998

The present situation is however materially different from the 1998 situation. First, the present trade action is limited to the US, unlike 1998 when a number of trade partners had imposed restrictions. Second, the Indian economy is now much stronger and materially more integrated into the global economy as compared to 1998. The impact of trade restrictions on the local economy, therefore, could be materially higher. Third, the political situation in India is much more stable now as compared to 1998, when the coalition was more fragile. Fourth, India has strengthened its global strategic position significantly in the past 27years. With several multilateral alliances (G-20, BRICS, QUAD etc.) and bilateral treaties, India has much stronger support from its global partners as compared to 1998.

Also read

New chapter in Indo-US relations

Speculating Trump’s second term

Ambivalent

…to continue tomorrow

The MPC noted the favorable domestic conditions like (i) inflation lower than estimates and closer to the lower bound of the policy tolerance limits; (ii) Robust growth, though below aspiration; (iii) transmission of the 100bps policy rate cuts continuing and its impact on the economy unfolding.

Urban consumer demand tepid, investment demand remains supported by govt capex

The MPC also noted that on the demand side: “Rural consumption remains resilient, while urban consumption revival, especially discretionary spending, is tepid.” However, “Fixed investment supported by buoyant government capex continues to support economic activity”.

Farm sector buoyant, services steady, industrial growth subdued

On the supply side, steady southwest monsoon is supporting kharif sowing, replenishing reservoir levels and boosting agriculture activity. Services activity also remains steady, though some high-frequency indicators recorded a modest expansion. Services PMI increased to an 11-month high of 60.5 in July 2025. Construction activity continues to exhibit resilience. However, growth in the industrial sector remained subdued and uneven across segments, pulled down by electricity and mining. While the manufacturing Purchasing Managers’ Index (PMI) remained elevated in Q1, the Index of Industrial Production (IIP) showed moderation.

Growth outlook strong, external challenges need to be watched closely

The MPC is of the view that the above normal southwest monsoon, lower inflation, rising capacity utilisation, and congenial financial conditions continue to support domestic economic activity.

The supportive monetary, regulatory and fiscal policies including robust government capital expenditure, should also boost demand. With sustained growth in construction and trade segments, the services sector is expected to remain buoyant in the coming months.

Prospects of external demand, however, remain uncertain amidst ongoing tariff announcements and trade negotiations. The headwinds emanating from prolonged geopolitical tensions, persisting global uncertainties, and volatility in global financial markets pose risks to the growth outlook.

The MPC maintained FY26 real GDP growth forecast at 6.5%.

Inflation to remain benign in FY26, to pick up in 1QFY27 on low base

The MPC that the inflation outlook for FY26 has become even more benign. Large favorable base effects combined with steady progress of the southwest monsoon, healthy kharif sowing, adequate reservoir levels and comfortable buffer stocks of foodgrains have contributed to this moderation.

CPI inflation, however, is likely to edge up above 4 per cent in Q4:2025-26 and beyond, as unfavorable base effects, and demand side factors from policy actions come into play. Barring any major negative shock to input prices, core inflation is likely to remain moderately above 4 per cent during the year. Weather-related shocks pose risks to inflation outlook. Considering all these factors, CPI inflation for FY26 is now projected at 3.1 per cent. CPI inflation for Q1FY27 is projected at 4.9 per cent with evenly balanced risks.

External sector resilient

India’s current account deficit (CAD) moderated to 0.6 per cent of GDP in FY25 from 0.7 per cent of GDP in FY24 due to robust services exports and strong remittances receipts despite higher merchandise trade deficit. Merchandise trade deficit further widened in Q1FY26. Robust services exports coupled with strong remittance receipts are expected to keep CAD within the sustainable level during the current financial year.

On the external financing side, gross foreign direct investment (FDI) to India remained strong during April-May 2025. However, net FDI moderated during this period due to higher outward FDI.

Foreign portfolio investment (FPI) inflows to EMEs have remained strong in May and June 2025. However, net FPI to India recorded outflows of US$ 0.8 billion in April-July 2025 due to outflows in the debt segment.

External commercial borrowings, on the other hand, witnessed higher net inflows compared to last year. Inflows under non-resident deposits too remained positive, albeit witnessing some moderation.

As on August 1, 2025, India’s foreign exchange reserves stood at US$ 688.9 billion, sufficient to cover more than 11 months of merchandise imports.

Overall, India’s external sector remains resilient.25 We remain confident of meeting our external financing requirements comfortably.

Liquidity remains comfortable, monetary transmission underway

System liquidity, as measured by the net position under the Liquidity Adjustment Facility (LAF), has been in surplus, on an average of ₹3.0 lakh crore per day since the last MPC, as compared to an average daily surplus of ₹1.6 lakh crore during the previous two months.

Going ahead, as the CRR cut announced in the last policy comes into effect in a staggered manner beginning September, it would further support liquidity conditions.

The comfortable liquidity in the banking system has reinforced transmission of the policy repo rate cuts to the money, bond and credit markets during the current easing cycle. In the credit market, the weighted average lending rate (WALR) of scheduled commercial banks declined by 71 basis points for fresh rupee loans (of which 55 bps is due to interest rate reduction) and 39 basis points for outstanding rupee loans from February 2025 to June 2025. On the deposit side, the weighted average domestic term deposit rate (WADTDR) on fresh deposits moderated by 87 bps during the same period. Moreover, the transmission to lending rates has been broad based across sectors.

Conclusion

In my view, the MPC sounded quite confident about the economic and monetary conditions. However, it repeatedly cited external geopolitical and trade related threat posing strong headwinds. I therefore read the latest pause on policy rates as a measure to preserve arsenal for a final push if the external environment worsens materially.

On Wednesday, the US president announced 25% extra (penal) tariffs on the imports from India, making the total tariffs to 50%, materially higher than the competitors. If a resolution to the latest implied sanctions on India, purportedly for importing crude oil from Russia, is not found, there could be significant pain in the economy in the near-term, till the policy, businesses and markets adjust to the new tariff regime.

The majority decision of the Fed to not cut rates is apparently against the wishes and open demand for a rather drastic cut in the Fed policy rates by the US administration, especially President Trump.

Strong April-June quarter GDP data and July private payroll data perhaps weighed on the Fed decision. The Commerce Department’s advance gross domestic product (GDP) report on Wednesday showed growth of 3.0% for the April to June period, above the 2.5% growth expected. US GDP shrank by 0.5% in the January-March 2025 quarter. U.S. private payrolls also increased more than expected July, rising by 104,000 jobs in July 2025 after a revised 23,000 decline in June.

Powell stays defiant

The Fed chairman Jerome Powell stayed defiant, not showing any sign of conforming to the political wishes and sticking to his mandate of keeping the prices under control and making employment conditions strong. In the post meeting conference Powell emphasized that there is no place for the central bank to consider government financing needs when setting interest rate policy. He said, “we don't consider the fiscal needs of the federal government. No advanced economy central bank does that, and it wouldn't be good”. Further adding that “it wouldn't be good for the Fed to do so as it would compromise its credibility”.

Important to note that the Fed has faced aggressive pressure from President Trump to cut rates. Trump has been claiming that said a large move down in rates (300bps) is justified by several factors, including stable inflation and improving fiscal conditions. At $1.1 trillion in interest rate payments last year, the cost of managing government debt has more than doubled since 2020 and that’s in some part driven by the high rates the Fed has in place to cool inflation levels.

Trade policy impact, a key variable

While the market participants agreed that it is important for the central bank to maintain its autonomy and make policy decisions on the basis of available and expected data, in order to effectively keep the prices under check.

Though Fed officials said that they “continuing to weigh data to see how big changes in government import taxes are affecting the economy, as financial markets continue to eye a possible September easing in short-term borrowing costs”, Chairman Powell suggested that he would like to wait for more data on impact of trade policy on prices, before taking any decision on rate cuts. Powell said the central bank has “made no decisions” about a potential policy change in September. He added, “Higher tariffs have begun to show through more clearly to prices of some goods, but their overall effects on economic activity and inflation remain to be seen.”

The US administration is pursuing a volatile and aggressive trade policy, in order to reset the terms of trade with its trade partners. It is still far from clear how the situation will finally appear once all trade related issues are settled. While the President has claimed that many trade deals, including with the EU, have been signed and the US is already on course to collect more than US$300bn in additional import duties this fiscal, reports suggest that a fresh round of trade negotiations in Sweden between the U.S. and China failed to result in a major breakthrough following two days of talks. Vietnam has also denied signing any trade deal with the US, as claimed by the president.

On Wednesday, Trump also announced that the United States will impose a 25% tariff plus penalties on India starting August 1, citing the country’s purchases of Russian military equipment and energy.

The impact of the increased tariffs on the domestic economy and inflation would be only known in a few months.

India’s reaction to tariff

The Ministry of Commerce has issued a guarded statement in response to Trump's announcement of tariffs and penalties on Indian exports to the US. The press release issued last night read as follows:

“The Government has taken note of a statement by the US President on bilateral trade.  The Government is studying its implications.

India and the US have been engaged in negotiations on concluding a fair, balanced and mutually beneficial bilateral trade agreement over the last few months. We remain committed to that objective

The Government attaches the utmost importance to protecting and promoting the welfare of our farmers, entrepreneurs, and MSMEs.

The Government will take all steps necessary to secure our national interest, as has been the case with other trade agreements including the latest Comprehensive Economic and Trade Agreement with the UK.”

Though the markets may react today to Trump's tariff announcement, it is too early to assess the impact. It is still not clear, whether key Indian exports like Pharma, that were part of a separate trade negotiation are also part of this 25% tariff announcement. The “penalty” is also a vague term at this point in time. A team of the US trade negotiators is scheduled to arrive in India later this month. It is possible that the tariffs are stayed till the negotiations are complete, or be reversed to a more favorable rate, just like it has been done in the case of South Korea yesterday.

This tariff announcement is at best a temporary measure, pending the finalization of a comprehensive trade deal likely to be finalized later this year.

I would therefore like to have more clarity before reacting to the tariffs. This includes not jumping to buy if the market falls sharply today.