Modi-Xi Handshake, Tax Cuts Boost Case For Lagging Indian Stocks

Prime Minister Narendra Modi’s symbolic handshake with President Xi Jinping in China, combined with fresh tax cuts at home, is fueling optimism that Indian equities will finally narrow the gap with their emerging-market peers.

Improving trade links with the world’s second-biggest economy add to a string of positives for India, including the prospect of further central bank interest-rate cuts. Bulls are betting these catalysts will more than offset the impact of US President Donald Trump’s 50% reciprocal tariffs.

Modi met Xi in Tianjin on Aug. 31, where both pledged to act as partners rather than rivals. Discussions covered border tensions, the resumption of direct flights and expanded trade. Analysts see the thaw as a potential boon for India in three areas: investment inflows, manufacturing know-how, and access to China’s clean-energy supply chains.

For investors, the symbolism comes at a critical time. Indian equities have lagged their global peers as U.S. tariffs and weak earnings dented sentiment. The Nifty 50 has gained just 4.6% this year, trailing the 19% advance in the broader MSCI emerging-markets index. The underperformance has come as global funds have withdrawn a net $16 billion from Indian shares in 2025.

The rapprochement with China “could mean the decline in allocation to India in EM portfolios we have seen in recent months being arrested or potentially reversed,” said Pramod Gubbi, a co-founder at Marcellus Investment Managers in Mumbai. The concern over US tariffs may “get offset by this boost to Indian economic growth and eventual earnings recovery,” he said.

A range of tensions have bedeviled relations between the world’s two most populous nations for decades. Frictions bubbled over into border clashes in 2020 that led to deaths of soldiers from both sides, sparking Indian boycotts of Chinese goods.

Greater Benefit

While both India and China stand to benefit from the upturn in relations, the former is likely to gain the most, according to RBC Wealth Management Asia.

“Improved Sino-Indian relations may benefit the Indian stock market more significantly, as India is currently the one facing the 50% tariff hike,” said Jasmine Duan, senior investment strategist at RBC Wealth Management in Hong Kong.

“For Chinese stocks, the impact is likely to be indirect and marginal at best, making it difficult to drive a major market trend,” she said.

One reason why India has more to gain from the improving relations is the current imbalance in trade between the two nations. While India exported $14.2 billion to China in the fiscal year ending March 2025, it imported a vastly higher $113.5 billion.

Some remain unconvinced about the impact of improving India-China ties, pointing out that the reports of the Modi-Xi meeting were scant in detail about any actual steps to deepen relations.

“It’s too early to tell which sectors or industries will benefit, as no concrete policies have been announced,” said Kunjal Gala, who oversees $2.3 billion as head of global emerging markets at Federated Hermes Ltd. in London. Any positive sentiment arising from diplomatic thaws with China is likely to be temporary, he said.

Meanwhile, policy support is another reason some investors are turning optimistic toward India. Reserve Bank of India Governor Sanjay Malhotra said last month the central bank remains on an easing cycle to support growth, including industries hit by tariffs. The RBI has lowered its benchmark rate by 100 basis points since February.

In another positive sign, a panel of federal and state finance ministers on Wednesday decided to cut goods and services taxes on almost 400 categories of products, representing about 16% of India’s consumer-price basket. Shares in consumer firms and carmakers rallied following the announcement.

“The warming of China-India ties can be a positive factor, while the tax cuts are also a structural tailwind for Indian equities,” said Anna Wu, a cross-asset strategist at VanEck Associates Corp. in Sydney. “The China-Russia-India block is in formation now amid historic tariffs, and could help India to increase its resilience against US tariff aggression.”