Indian equities: tariff-war insulation?

Please note: This article is written by our Investments team in India, and may reflect a different positioning versus other regions. 

All data referenced in this article is sourced from Refinitiv Datastream unless otherwise stated, and is accurate at the time of publishing.    

Key points 

• With global growth likely to slow following a barrage of US tariffs in April, India’s economic growth prospects remain encouraging
• After cutting rates again in April, the Reserve Bank of India is expected to trim rates by another half a point this year, as it focuses on supporting the economy 
• Indian equity markets will be driven by the latest earnings data, heightened India-Pakistan tensions and tariffs wars. That said, local businesses are more domestically focused than many of their peers
• For domestic bond investors, with elevated uncertainty set to persist, a dynamic ‘barbell’ strategy of long-duration government securities with curated high yield bonds could be a prudent approach to take.

A barrage of US trade tariffs unleashed in April caused havoc in financial markets as investors digested the likely disruption to global supply chains and hit to global economic growth.  

Despite domestic inflation cooling in March, the US Federal Reserve (Fed) is in a very tight spot, as it attempts to stimulate growth while bringing inflation down to their 2% target, amid the effects of an escalating trade war. Indeed, calls from the US president in April for the Fed to cut rates, heeps yet more pressure on rate setters. 

In India, high-frequency growth indicators pointed to continued, albeit mixed, economic momentum in March. The Reserve Bank of India (RBI) has emphasised the resilience of the local economy, with growth driven by strong sectoral performance and better consumption patterns. While a global tariff war remains a concern, the RBI cut interest rates by another 25 basis points in April, which should be positive for Indian growth prospects. Indeed, the central bank expects output to grow by 6.5% in this fiscal year.  

Earnings and India-Pakistan tensions are key for local equities  

The prospect of tariff wars and weaker global growth have seen macro data, such as the US dollar index, 10-year Treasury yields and Brent crude prices, cool. While lower oil prices might be positive for Indian equities, all eyes are on US tariffs. 

India is in a better position than many, not least China, from the global tariff shock. The domestic Nifty 50 index generates a high proportion of its revenues locally than many overseas peers. For instance, the contribution of technology, pharmaceutical and metals companies (ie all global-facing sectors) to the Nifty 50’s FY25 earnings is likely to be around 20%. Of these sectors, technology and pharmaceuticals also benefit from the cheaper labour costs to many peers, implying a limited impact from tariffs on earnings growth forecasts.  

Indian equity markets are more competitively valued after the recent sell-off. The Nifty 50’s price-earnings ratio is 18-19x on consensus earnings per share forecasts that are close to their mean for the last 10 years. The latest earnings season and management outlooks will be key to the direction of markets in the near term. We expect earnings growth to revert to double-digits in FY26, after a more muted showing in FY25.  

Overall, this is time to invest any new money in a staggered manner. Large-cap stocks remain more preferred. In the short term, increased tensions between India and Pakistan seen of late are likely to add to market volatility and sentiment.  

More rate cuts likely as RBI focuses on growth  

The RBI’s recent rate shift of gears to cut rates and focus more on growth, is likely to make the case for investing in domestic bonds more compelling, not least a way to diversify portfolios and counter the effects of higher volatility in other asset classes. 

Despite the focus on protecting growth in the face of so much uncertainty, the pace of US rate cuts and the narrowing spreads between developed market and emerging market rates could slow the pace of domestic rate cuts.  

The RBI is likely to trim rates by another half a point this year, taking the terminal rate to 5.5%. In such an environment and with elevated market uncertainty, a dynamic ‘barbell’ strategy of long-duration government securities with curated high yield bonds seems to be a prudent approach.  

Alternative assets: Gold and private markets 

The outperformance of gold in April highlighted its credentials as a hedge and portfolio diversifier, not least in uncertain and turbulent times. The yellow metal is also supported by falling real yields and strong central bank purchases.   

Private equities, credit, REITs and InvITs can also help investors to create a well-diversified portfolio. However, private-market investments can be complex and illiquid, and so need careful consideration prior to dealing in them.