Tariffs, Alliances And Diplomacy: Navigating India's Economic Crossroads | Talking Point This Week

To all, Michhami Dukkaddam. We celebrated the festival of forgiveness this week, as well as ushered in Lord Ganesha in our homes and hearts. But while we enjoy the best period in a calendar in India, there is tough news too. India is now incurring 50% tariffs on exports to the US, starting Aug. 27, making it one of the highest tariffed countries. An estimated 70% ($55 billion) of India's exports to the US are now under threat, accelerating downside risks to growth. And amidst all the non-diplomatic comments by Peter Navarro, Scott Bessent mentioned: “I do think India’s the world’s largest democracy, the US is the world’s largest economy. I think at the end of the day we will come together.” I must add though, if this looked like being the biggest news, the street is set for heavy newsflow over the next seven days, with PM Modi's meetings with Japanese and Russian leaders, and the much touted 'Dragon-Elephant' tango on Sunday. In other newsflow, R Ashwin has retired from IPL. An end to a glittering career.

To all, Michhami Dukkaddam. We celebrated the festival of forgiveness this week, as well as ushered in Lord Ganesha in our homes and hearts. But while we enjoy the best period in a calendar in India, there is tough news too. India is now incurring 50% tariffs on exports to the US, starting Aug. 27, making it one of the highest tariffed countries. An estimated 70% ($55 billion) of India's exports to the US are now under threat, accelerating downside risks to growth. And amidst all the non-diplomatic comments by Peter Navarro, Scott Bessent mentioned: “I do think India’s the world’s largest democracy, the US is the world’s largest economy. I think at the end of the day we will come together.” I must add though, if this looked like being the biggest news, the street is set for heavy newsflow over the next seven days, with PM Modi's meetings with Japanese and Russian leaders, and the much touted 'Dragon-Elephant' tango on Sunday. In other newsflow, R Ashwin has retired from IPL. An end to a glittering career.

Here are the key talking points of this week:

Why Are US Markets Not Freaking Out?

Paul Krugman says this of markets behaviour - "My read of economic and financial history is that market pricing almost never takes into account the possibility of huge, disruptive events, even when the strong possibility of such events should be obvious. The usual pattern, instead, is one of market complacency until the last possible moment." There are enough telltale signs which have been pointing to why the US markets should pause, or correct. And one would never know the timing of a potential crack. Overheated valuations (S&P 500's PE), economic uncertainty due to Trump’s tariff policies and slowing growth, with weaker job market data, as well as low market volatility are all potential triggers for a pullback. Lets see if it comes as a surprise or otherwise.

India-Japan Bonhomie

On Friday morning, after his first set of conversations, PM Modi emphasised that the India-Japan partnership is "strategic and smart," driven by economic logic that transforms shared interests into shared prosperity. He highlighted India’s role as a springboard for Japanese businesses to access the Global South, positioning the partnership as a key driver for stability, growth, and prosperity in the Asian century. There are great expectations on green energy transmission, PM Modi noted. And in a call for Make in India and make for the world, he said that sectors like manufacturing, auto and energy are booming in India. "Together we can contribute to the growth of the global South," he said. "There are successful business that can be owned by both countries together."

The investment friendship with Japan has been around for long. Let us see if it picks up pace for the times ahead.

Inflection Points Ahead?

The MSCI India Index has significantly underperformed the MSCI Emerging Markets (EM) Index, lagging by 18% since mid-April 2025 and by nearly 24% over the past year, marking the largest underperformance in 15 years on a trailing 12-month basis. In contrast, North Asian markets like Korea (+34%) and Taiwan (+44%) have posted robust gains in USD terms, highlighting a stark divergence in regional performance. Historically, after such substantial underperformance periods (15-20%), the MSCI India Index tends to rebound. Recent posts on X also suggest growing investor interest in Indian equities, with some pointing to potential recovery driven by domestic reforms and undervaluation relative to other EMs, though concerns about high valuations and global economic headwinds persist. This combination of historical trends and current market sentiment indicates a possible inflection point for Indian markets in the near term.

Nomura On Rates

Nomura notes that recently, most Asian central banks have adopted a cautious, observational stance, but we anticipate the next phase of monetary policy relaxation will commence shortly, driven by five key factors: 1) the emerging economic impact of US tariffs and China’s slowdown; 2) inflation rates falling below target levels; 3) high real interest rates; 4) the US Federal Reserve’s shift toward policy easing; and 5) diminishing concerns about financial stability. Their revised calculations of Asia’s trimmed mean and weighted median inflation indicate that core inflation is below target in all countries, with a notable inflation shortfall of -0.6 percentage points in Indonesia and at least -1 percentage point in the Philippines, India, Thailand, and Singapore. Nomura's adjusted Taylor rule estimates suggest the potential for policy rates to fall even lower than anticipated in China, India, the Philippines, and Thailand.

Own One?

As we end, a telling statistic of last week. Sales of Labubu dolls pushed Pop Mart’s net profit up by 400% year-on-year in the first half of 2025. Collectors outside the Chinese toymaker’s home market have gone crazy for the smiling, elvish trinkets. Some 40% of sales were abroad. The firm, whose shares have risen by nearly 250% since the start of the year, is worth more than three times as much as Mattel and Hasbro, America’s biggest toymakers, combined. Do you own a Labubu doll?

Ganpati Bappa Morya,

Niraj