The possibility of higher-than-anticipated tariff numbers and the lingering uncertainty about final tariff rates for different countries will weigh on investor sentiment. Non-tariff measures and currency undervaluation concerns will further complicate the scenario.
He advised that markets should brace for continued volatility over the next couple of months, suggesting that caution is warranted in the near term.These are the edited excerpts of the interview.
Q: April 2 is essentially the tariff deadline for reciprocal tariffs. Now, US President Donald Trump has called it the US Liberation Day. But most market participants know it as reciprocal tariffs day, and there has been a lot of uncertainty around tariffs. Markets remain on the tenterhooks. What do you think about this issue?
A: Our sense is that look, India will be one of the many trading partners that will likely get included in the reciprocal tariffs. I think the Office of US Trade Representatives sought inputs from 19 other trading partners. Out of those, 15 have trade surpluses with the US, which covers close to 90% of the US imports. So, India would be one of the 15 trading partners we think could come in under the reciprocal tariffs.
If you just looked at the rate, purely on the basis of product-by-product weighted average reciprocal tariffs, which is that if the US matches India’s tariffs on each of the products, that effectively means about 11% in higher tariffs on India. But then we also have to keep in mind that the number could be a bit higher because of non-tariff measures like subsidies and import bans, and there’s also VAT. So there is a lot of uncertainty about whether the US will include VAT or not. Europe is a large risk there as well. So depending on what the number could be, it could be north of 11%, which is based on the weighted average tariff rates.
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The one thing I wanted to mention here is that our general sense is that these proposed tariff rates are intended to be a basis for negotiation as we have seen in the Mexico and Canada cases. And so the likely number for each country is probably going to be somewhat higher than what the pure product-level matching of the tariffs would suggest. And then there will be room for that to get negotiated down.
Q: So on a weighted average basis, tit-for-tat, reciprocal tariffs, 11% could be the number. Again, this is more than anything else, a thought exercise. But if you throw in VAT, etc., the number could be meaningfully higher than 11%. It’s possible.
A: Yes.
Q: As you also explained, it is, in a way, an opening gambit for negotiations. Is that the way to think about it? For example, if the number is 20%, the market will be shocked, but will that then be reduced based on how negotiations go?
A: That is exactly our expectation because there are a couple of things here. One, if you look at the amount of imports these trading partners have, that is almost thrice what the imports from Mexico and Canada were. So the quantum we are talking about is quite large, which means that if you go by precedent and delay the tariffs on Mexico and Canada by 30 days, and then partially reduce those tariffs for another 30 days, that just suggests that there will be some room for negotiation, and it won’t be implemented immediately in India’s case, and, for that matter, in most countries’ cases.
As I said, these numbers are open to negotiation, in which case the numbers could be higher. Then there will be a 30 to 60-day window, where there will be some back-channel talks, and there will be room to take those numbers lower.
Q: It is also possible that, instead of saying, “Okay, the number is 20%,” and then walking back from 20, they say, “Well, it’s 10 now, and 10 more coming.” So that also, in that sense, could be a way to negotiate and ask for proof that India is willing to work with the US. We don’t know exactly what combination and measures they might use.
A: As I said, we are not entirely clear how it will be implemented, but just going by prior instances with Canada and Mexico, most likely the number is going to be higher, most likely it won’t be implemented immediately on day one. They will give a window before this gets implemented, and then within that window, the numbers will likely be negotiated down.
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In some cases, if there is potentially a deal, it could even be revoked entirely, as we saw in some cases. So there is a lot of uncertainty around how this pans out. It does feel like the market will be somewhat negatively surprised, because the quantum of this is going to be larger than many of our investors are thinking, and it is probably going to be pretty broad-based when it comes to different countries.Q: Market expectations are under 10% right now?
A: Yes, on a weighted average basis, some of the recent surveys we conducted among clients show an average of around 9-10% across these trading partners, not singling out India here, but that is what the expectation is, about 10%.
Q: Are you leaning toward the fact that VAT will be included, and who knows currency as well?
A: That is why we said the numbers could be much higher. Because, as you correctly pointed out, there is the product-level sort of tit-for-tat tariff matching.
On top of that, there are the non-tariff measures. On top of that, there could be VAT. And then there is the currency undervaluation in some cases, and India obviously checks that box as well as the sort of US administration. And then there is the additional news flow that they just mentioned, in terms of countries that are importing oil from Venezuela, that could also be subject to additional tariffs. And obviously, there are other countries, like China and the EU, which are more impacted by that. But India at the margin is also there.
So there are some multiple layers on top of the pure reciprocal level product-by-product tariffs, which could come in. All of those things point to the same conclusion, which is that the initial number could be a little bit higher than what the market is anticipating. This is partly the reason that we also think that it makes sense to be a bit more cautious in the markets in the near term because of this sort of impending risk.
Q: If this becomes the view that starts with a big number and then walks back, will markets react in a very negative way? Maybe we get a bit of a dip globally, and then that gets bought into.
A: The way this has been asked in our conversations is whether April 2 is the clearing event in that sense. They announce stuff, and then the market sort of looks beyond it. So now it is already announced, and that is a clearing event for the markets. We sense that it could still be an initial shock, as I said because the numbers will be higher than what the market is currently anticipating. And then there is room for negotiation, there is a window for each country, in which case, there will still be uncertainty in the market.
So the way we think about it is that you probably continue to have some uncertainty related to tariffs over the next 30 days before things start to get clearer in terms of what the final tariff rate would be for each of the countries. And so this will be something that will be an overhang for us for the next couple of months.
Q: Here in India, there have been some news reports that India is looking to cut tariffs on half of its imports into the country. So it’s fluid out there. This is also obviously a bit of posturing – showing the other side that we are willing to work even before. – preempting some of this. So any thoughts there?
A: As we know, the US Commerce Ministry was in Washington a couple of weeks back, and obviously, there have been talks with India, similar to other countries as well. So it is all a part of the deal, or the negotiation tactics, as we just mentioned. It could very well be that, as you said, India would reduce tariffs on some of the imports well ahead of this or even post-actual announcement. Because the announcement, as I said, the implementation, will be delayed. So India could still implement these things post-April 2 announcement.
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They could also increase the purchases of defence, and energy-related imports from the US. And so each country will probably try to negotiate, probably try to lower tariffs in some categories where it is too high compared to what the US is charging, and then also increase some of the spending in areas of defence and energy, which the US is keen on. And so all of this will be probably part of the countries showing the US that they are willing to work with them and come to a more reasonable deal.
Q: Is it possible to form a view on the markets with all of this uncertainty, do you have one? On April 1, we will also have these middle-class tax cuts, which come into effect, perhaps a few months later. April 9 is the Reserve Bank of India (RBI), maybe a rate cut. What is the view on the market itself here?
A: As you may recall, we had downgraded the market from overweight to market-weight back in October, so about six months back. The view there was largely on the back of the cyclical growth slowdown. So fast forward, we have already seen markets come off. Valuations for the largecaps have come off. But our general sense is that on the domestic side, growth has bottomed out, but it is still going to be a gradual recovery. You still have policy, especially on the fiscal side, which is somewhat restrictive. We still have an earnings cycle, which is seeing more downgrades than upgrades.
So we still think there are a couple of quarters of downgrades left. We also know that smallcaps and midcaps have much higher valuations, and the positioning there is still not clean, especially within the domestic funds. So there are still more risks on the domestic side, even though the worst is behind us. But then on top of that is what we were discussing on the global side, which is that you have the impending reciprocal tariffs that will come and hit us, which will be with us for a while before things stabilise.
And so because of all of this, we still think it may be a little too early to take broad-based exposure in the market. So we are somewhat cautious in the near term. We are much more alpha-focused, looking at companies and sectors where you have got higher earnings visibility, stronger balance sheets, and a more quality bias. That is how we are leaning within our sector allocation.
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