Impact of Trump policies on Indian stock market could become profound if Donald Trump returns to the U.S. presidency and escalates trade tensions, shifting from bilateral conflicts to broader, multilateral confrontations. This change, according to brokerage firm Nuvama, could significantly disrupt global trade flows, slow economic growth, and drive prices higher on a global scale. Combined with Trump’s potential fiscal policies, slowing earnings growth in India, and high domestic stock valuations, this scenario could make the Indian market particularly vulnerable if Trump resumes office.
In addition to escalating trade tensions, Trump’s potential fiscal policy decisions could introduce more complexity to the global financial landscape. Any push to widen the U.S. fiscal deficit, whether through tax cuts or increased government spending, could raise U.S. bond yields and strengthen the dollar. A higher dollar would make imports more costly for India and put pressure on the rupee, while rising bond yields would increase global borrowing costs. Nuvama’s analysis suggests that with Indian stock valuations already elevated and earnings growth decelerating, the combination of these factors would add to market volatility and put pressure on domestic investors. In light of this outlook, Nuvama has maintained a defensive bias in its model portfolio, overweighting private banks as one of the few areas showing resilience among cyclical stocks.
Nuvama pointed out that during Trump’s first year in office in 2017, the global markets experienced a strong rally, thanks to favorable growth, robust corporate earnings, and reasonable valuations. This rally was, however, disrupted in 2018 when Trump implemented significant tax cuts. These tax cuts led to a market pullback, especially among midcap stocks, which saw corrections ranging from 20% to 30%. The information technology (IT) sector managed to stand out as the best-performing sector that year, benefiting from increased U.S. corporate spending and a depreciating rupee that made Indian tech exports more competitive.
In today’s market, the situation is different. Indian stock valuations are currently high, and earnings momentum is weakening, which makes the market more sensitive to external shocks. Any rise in U.S. bond yields or setbacks in global trade could amplify volatility in Indian markets. According to Nuvama, two key areas of policy demand close monitoring: trade and fiscal policy, as both are likely to have direct implications for India.
On the trade front, Trump may shift to a more aggressive, multilateral approach in his tariff policies. Up until now, Trump’s trade focus has largely been on China, with various tariffs imposed since 2018 to reduce the U.S. trade deficit and boost domestic manufacturing. However, the effectiveness of these measures has been limited, with minimal improvement in U.S. manufacturing output or trade balance. Consequently, Trump may expand his trade measures to other countries, which would deepen global trade tensions. If tariffs were imposed on multiple trading partners, the resulting disruptions to global supply chains and price increases would likely have ripple effects on India’s economy, especially as a country highly integrated into the global trade system.
Domestically, Trump may consider another round of tax cuts or fiscal spending to boost the U.S. economy—actions that could lead to a larger fiscal deficit. This approach would echo the policies from his first term, although the U.S. government debt has risen considerably since then, making such policies more challenging and potentially riskier. An increased U.S. fiscal deficit and mounting government debt could drive U.S. bond yields even higher, attracting global investors to U.S. debt markets and exerting downward pressure on emerging markets, including India. Higher U.S. bond yields would also likely raise global interest rates, making it more expensive for companies in India to borrow and invest, which could slow economic growth.
As far as India’s monetary policy is concerned, an increase in US bond yields could delay the RBI’s expected rate cuts. The RBI has been aiming to keep interest rates low to support domestic economic recovery, but external factors like higher U.S. yields could limit its options. If Trump’s fiscal policies push global bond yields higher, the RBI may be forced to maintain higher interest rates to protect the rupee and manage inflation, potentially impacting India’s economic growth trajectory.
In summary, should Trump pursue aggressive trade and fiscal strategies, it could introduce significant macroeconomic pressures globally. Higher inflation, slower growth, and increased financial stress could be expected if trade wars expand and U.S. fiscal policies add to the debt burden. For Indian markets, this would likely mean increased volatility and higher borrowing costs, with limited scope for the RBI to counteract these pressures through rate cuts. In light of these uncertainties, Nuvama has chosen to adopt a cautious stance, focusing on private banks as the only major cyclical sector in its portfolio while remaining defensive in other areas.