India’s trade faces tariff shock

India’s exports face a steep 50% US tariff, triggering $4.4B in foreign outflows, sectoral earnings downgrades, and market volatility, but strong domestic investor flows and GDP growth help cushion the impact.

Under the new Trump administration, the US imposed tariffs of 10% to 50% on imports from over 80 countries. India and Brazil faced the highest rate of 50%, driven by concerns over market access and trade misalignments, despite contrasting trade balances-the U.S. had a $7 billion surplus with Brazil and a $46 billion deficit with India. Meanwhile countries with larger deficits like Vietnam ($123B), Taiwan ($74B), Japan ($69B), and the EU ($236B)¹, were subject to moderate tariffs between 15%-20%, due to their roles as strategic allies and supply chain alternatives.

Weekly highlights

US tariffs on Indian goods: Sectoral impact and market implications

The 50% tariff on Indian goods came into effect on August 27, 2025, following an announcement by the United States earlier in the month. The move involved a 25% hike over an existing 25% rate, making it one of the steepest tariff measures globally. India exported goods worth $86.5 billion to the US in FY 2024–25, representing 19.8% of its total merchandise exports. Of this, the majority of exports will now face the 50% tariff, covering sectors such as textiles, gems & jewelry, dairy & agriculture, machinery & engineering goods, ceramics, and furniture. Gems & jewelry and textiles are particularly exposed, with the U.S. absorbing nearly 33% and 29% of India’s total exports in these categories-both of which are labor-intensive and employment-heavy. However, several strategic categories remain exempt, including pharmaceuticals (which represent 40% of India’s total pharma exports), active pharmaceutical ingredients (APIs), electronics, refined light oil, gasoline, and aviation turbine fuel.

The announcement of new tariffs disrupted the Indian equity market’s recovery from a late-2024 sell-off, which had been driven by stretched valuations and slowing earnings growth. YTD, India has returned 6.42%², underperforming major global indices and trailing the MSCI Emerging Markets Index by 18%³. Despite this, valuations remain elevated, with the MSCI India Index trading at a forward P/E of 22.28-nearly 9% above its 10-year average. The imposition of an additional 25% tariff triggered foreign portfolio outflows totaling $4.4 billion⁴, weakening the rupee and increasing currency volatility. While equity indices initially dipped, they rebounded on optimism surrounding potential diplomatic engagement, policy support, tax reforms, and resilient domestic inflows. However, with trade negotiations stalling, the MSCI India Index declined 1.2% ahead of the August 27 tariff rollout. Following this, Indian corporates saw sharp earnings downgrades across key sectors, reflecting weak quarterly performance, margin pressures, and sector-specific headwinds. Consumer Discretionary was impacted by muted demand and elevated valuations; Health Care by regulatory constraints and weak exports; Financials by slowing credit growth and rising funding costs; and Consumer Staples by margin compression and uneven rural trends. Notably, the MSCI India Index saw a forward EPS revision of -0.9% and NTM EPS growth of -0.6% as of end of August.

While exports to the U.S. represent only about 2% of India’s GDP, and total exports account for 21%⁵ of GDP in FY2025, India’s economy remains fundamentally consumption-driven and less exposed to external trade shocks than many other emerging markets. As a result, the recent U.S. tariff announcement, though disruptive to sentiment, is less of a structural concern. What matters more to investors is the lack of a sustained recovery in corporate earnings, which continues to weigh on valuations. Encouragingly, domestic investor participation has remained strong, with SIP⁶ flows rebounding from April after a slow start to the year. This has helped cushion the impact of foreign portfolio outflows and supported market sentiment. Additional tailwinds include upside surprises in GDP growth for two consecutive quarters, reaching 7.8% in April–June 2025 and increased clarity on tax reform measures. However, going forward, a meaningful and sustained pickup in earnings will be the key driver of market performance.