Nomura warns 25% penalty tariff on India not fully priced in by foreign investors

Investors may not be fully factoring in the risk of fresh US tariffs on Indian exports, according to Robert Subbaraman, Head of Global Macro Research at Nomura Singapore. “My sense speaking to investors overseas… is that if that penalty, 25% tariff does go into effect on August 27, that is not fully anticipated, and so you will see a negative response,” Subbaraman cautioned.While India’s domestic policy efforts such as encouraging local consumption, rationalising GST rates, and improving ease of doing business could cushion the impact of a 25% tariff, these steps may not be enough if tariff rates were to rise further to 50%, he added.

He stated that ongoing negotiations between the US, European Union, and Russia-Ukraine could still prevent the tariff hike, but if imposed, the impact could be disproportionately large. Higher tariffs tend to have a “non-linear” effect, he explained, citing the US-China trade war, where steep hikes brought trade to an abrupt halt.

Despite the external risks, Subbaraman said India’s domestic policy response has been proactive, from ease of doing business reforms to efforts that encourage local consumption. The government’s GST rationalisation, which reduces taxes on low-cost items while raising them on luxury goods, is expected to boost lower-income households and support consumption without significantly worsening the fiscal deficit.

Also Read: S&P upgrade lifts sentiment, but tariffs and fiscal risks may temper India’s outlook, say economistsOn the monetary side, Subbaraman expects the Reserve Bank of India (RBI) to deliver two more rate cuts by year-end as inflation trends lower, providing a buffer against external shocks. He also underlined that India’s recent S&P rating upgrade reflects years of “prudent monetary and fiscal policy,” giving the economy more credibility and space to respond.

While exports are likely to slow if tariffs are implemented, Subbaraman emphasised that domestic demand, supported by fiscal and monetary measures, will be a key cushion for India’s growth outlook.

Also Read: Demeter’s Agarwal sees auto stocks revving up on GST cuts, broader consumption to gain

Watch the interview in the accompanying video

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