Mumbai: The Indian stock market is facing significant challenges due to the tariffs imposed by U.S. President Donald Trump, according to Rajesh Cheruvu, Managing Director and Chief Investment Officer at LGT Wealth India. Although macroeconomic indicators are on the rise, effective policy intervention will be crucial for maintaining growth momentum amid these disruptions. Key sectors, especially those reliant on exports, could feel the pinch, but lower crude prices may provide some much-needed fiscal relief.
Impact of Tariff Disruptions on the Indian Economy
As the Indian economy navigates the complex waters of global trade, the adverse effects of tariffs imposed by the Trump administration loom large. Rajesh Cheruvu highlights that while macroeconomic indicators like rural consumption and lower inflation suggest a positive outlook, they alone may not mitigate the challenges posed by these tariffs. The export sector, particularly labor-intensive industries, may see a potential impact amounting to around USD 45 billion, posing a risk to the overall growth trajectory of the Indian economy.
Following a phase of subdued consumption, aided by a favorable monsoon, some sectors are beginning to recover. However, the underlying threat of tariff-induced disruptions could overshadow these gains. The good news is that decreasing crude oil prices offer the Indian government opportunities for fiscal intervention through targeted incentives. Cheruvu underscores that while the macroeconomic picture might promise resilience, it is crucial for policymakers to act swiftly to prevent tariff shocks from derailing existing growth momentum.
Outlook for the Stock Market in 2025
Looking forward, Cheruvu paints a cautiously optimistic picture for the Indian stock market in 2025. Historically, Indian equities have shown returns that align with earnings growth and nominal GDP trends, although recent months have highlighted a phase of earnings moderation across varios sectors. This moderation has naturally mirrored the performance of the stock market, creating a disparity between high valuations and relatively stagnant earnings.
Despite these challenges, Cheruvu asserts that the long-term outlook remains constructive. Factors like falling inflation rates and supportive fiscal and monetary policies are positively impacting consumption trends. The valuations are now either close to or below long-term averages, which could create a cushion for future growth. If earnings begin to rebound alongside new business cycles, there is potential for the market to shift higher, especially leading into 2025.
Examining Derivatives and Retail Participation
With the rise of retail participation in the derivatives market, the Securities and Exchange Board of India (Sebi) has introduced proposals aimed at elongating derivatives expiry. These initiatives come in response to studies showing that many retail investors experience poor outcomes due to short-term trading. Cheruvu notes that elongating expiration periods could effectively moderate excessive trading, steering retail investors towards more stable, long-term strategies.
While elongation may not entirely eliminate speculative behavior, it is likely to bring about a more disciplined approach to trading. This alteration in the derivatives market structure could lead to better alignment of trading activities with genuine hedging needs and potentially steer retail flows toward cash equities. Although there may be initial reductions in liquidity for near-term contracts, the overall market could gradually adapt and rebalance under the new framework.
Investment Strategies: Gold, Equities, and Diversification
When it comes to asset allocation, gold continues to stand out as a reliable investment option amid fluctuations in equity markets. Over the years, gold has historically delivered attractive long-term returns, often providing diversification in investment portfolios. Cheruvu advises investors to consult with investment managers to tailor their allocations based on individual risk profiles. In a balanced portfolio, gold serves as a hedge and stabilizer—while equities are typically the core drivers of growth, and fixed income instruments add stability and regular income.
In light of current market trends, maintaining a varied portfolio encompassing different asset classes can be a prudent strategy. Cheruvu asserts that while gold provides essential diversification and risk management, equities remain vital for long-term wealth creation. Fixed income investments should also be part of the mix to provide balance and consistent income flows.
Current Trends in Foreign Investment
The Indian stock market appears to be witnessing a shift as foreign investors begin to seek opportunities in other emerging markets. Despite an initial surge post-COVID, the Indian market’s recent relative underperformance can be attributed to two primary factors: cyclical weakness in corporate earnings and inflated valuations compared to its emerging market peers. As a result, global investors are recalibrating their strategies towards cheaper markets that are more amenable to the commodity and interest rate cycles.
Cheruvu views this trend as temporary. He believes that the Indian economy’s strong macro fundamentals—from robust domestic consumption to fiscal stability—will eventually attract investment back into the market. Although the near-term may continue to exhibit relative underperformance, Cheruvu expects that over a 6 to 12-month horizon, India could once again solidify its position within the emerging market landscape.
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
Bankerpedia’s Insight💡
The potential export impact from U.S. tariffs poses a significant challenge for India’s banking and finance sector, especially for labour-intensive industries. While the overall macroeconomic outlook remains positive, proactive policy intervention is crucial to mitigate tariff effects. Financial institutions should prepare for volatility, emphasizing risk management. Investors are advised to remain disciplined in asset allocation, aligning with sectors poised for recovery rather than reacting to short-term market movements. By focusing on fundamentals, both investors and banks can navigate these turbulent waters effectively and support sustainable growth amid external pressures.
What Does This Mean for Me?🤔
- Salaried Person → Volatile markets may affect salaried individuals’ investments.
- Business Owner → Increased tariffs may impact growth and export opportunities.
- Student → Market instability may affect student job opportunities and internships.
- Self-employed → Increased market volatility affects self-employed income stability.
- Homemaker → Higher tariffs may raise living costs for Homemaker households.
- Retiree / Senior Citizen → Potentially lower returns, impacting retirement savings stability.
- Job Seeker → Job market uncertainty due to economic disruptions and tariffs.
- Farmer / Rural Citizen → Rural consumption improvement may offset tariff-related disruptions.
Research References📚
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