Trump's Tariff Trigger Growth Concerns: GDP Dip, Equity Volatility Seen Ahead

The imposition of steep reciprocal tariffs by US President Donald Trump has triggered concern across global markets, and India is no exception. Morgan Stanley, Bank of America, and Jefferies have highlighted potential economic and equity market risks for India, stemming from the 26% tariff on Indian exports to the US, which came in significantly higher than the expected 10%.

Jefferies spoke to over 20 Indian companies to assess the impact of the newly announced US reciprocal tariffs. The consensus is that the current 27% tariff on Indian exports is unsustainable and likely to be negotiated lower. While large companies may shift supply chains to low-tariff regions or the US, most Indian firms lack the scale or confidence in US policy stability to make such moves.

Morgan Stanley sees downside risks of 30–60 basis points to India's financial year 2026 GDP growth estimate of 6.5%. This is because India’s exports to the US comprise just 2.1% of GDP. The brokerage also cited indirect effects such as delayed private investment, weaker global demand, and lower corporate confidence as reasons for the projection.

In response to these tariffs, the brokerage expects the Reserve Bank of India to respond with a 25 bps rate cut in April and possibly up to 75 bps over time, along with a pause in fiscal consolidation if needed. A potential trade deal with the US by late 2025 could help offset some of the tariff-driven downside, it said.

Some argue India is relatively better placed due to its small contribution to the US trade deficit and limited export exposure, BofA said. However, the broader risks are significant, it said.

The tariffs could indirectly hurt India by delaying private investment, lowering credit growth, and increasing uncertainty around foreign direct investment. Additionally, any global slowdown or trade war escalation could impact India through weaker demand and currency volatility.

BofA remains cautious on Indian equities amid global uncertainty. It expects Nifty to return less than 7% in 2025, with small- and mid-caps facing potential downside. The brokerage favours domestic-facing sectors like financials, real estate, and autos (excluding Tata Motors), and remains underweight on globally exposed sectors such as IT, metals, and energy due to their sensitivity to global trade and pricing cycles.

Despite the surprise tariff levels, Jefferies sees no major near-term impact on large export sectors like IT services, pharma, and autos. The bigger concern is a potential US recession, which could hit global demand and hurt Indian exporters indirectly. Jefferies suggests using market dips as buying opportunities, especially in pharma.