Tariffs raise recession risks in US, put Fed in tight spot: VK Vijayakumar

Trump Tariff News: The short-term impact on the market will be negative. The probability of US recession by end 2025 has increased

Trump Tariffs: Declaring April 2nd to be ‘liberation day’ for the US, President Donald Trump announced sweeping tariffs on most countries. The tariffs will come into effect from April 9th. The baseline tariff of 10 per cent will come into effect from April 5th. Justifying the high reciprocal tariffs President Trump said, "for decades, our country has been looted, pillaged, raped and plundered by nations near and far, both  by friends and foes alike.” The reciprocal tariffs are claimed to correct this wrong done to Americans.

 

The tariffs are across the board, sparing no one. The tariffs imposed on India is 27 per cent. This is relatively lower when compared to the tariffs imposed on other countries like Vietnam (46 per cent) Sri Lanka (44 per cent), China (34 per cent), Taiwan ( 32 per cent) and South Africa 30 per cent. The treatment meted out to China is extremely harsh since the additional 34 per cent is on top of the 20 percent imposed earlier pushing up the total tariffs to 54 per cent.   ALSO READ | Analysts favour India stocks in Asia post-tariffs despite near term worries

 

The 27 per cent tariff imposed on Inda is worse-than-expected. However, this is unlikely to have a major impact on the Indian economy. India’s bilateral trade with the US is about $124 billion; India’s exports to the US are $81 billion with India enjoying a trade surplus of about $ 37 billion. The maximum hit to India’s exports  to US is likely to be around $ 3.6 billion, which is only 0.1 per cent of India’s GDP. However, the concern is that this reciprocal tariffs will trigger retaliatory action from other countries leading to a full blown trade war impacting global trade and global growth. India’s growth also will suffer in the context of global growth slowdown. It would be challenging for India to achieve growth rate above 6.5 per cent in FY26.  

The short-term impact on the market will be negative. The probability of US recession by end 2025 has increased. Since the tariffs will lead to higher inflation in the US, the Fed will be in a tight spot unable to cut rates as markets had expected and factored-in.   ALSO READ | How will Donald Trump's reciprocal tariffs impact India?

 

It is important to understand that there will be no winners in a full blown trade war. This ‘liberation day’ can be the stifling for many countries, and they will be forced to retaliate. 

 

From the Indian stock market perspective, the exemption to pharmaceuticals is a positive. The pharma stocks are likely to rally. Domestic consumption focussed sectors will be preferred by investors.  (As told to Puneet Wadhwa)  ============  Disclaimer: VK Vijayakumar is Chief Investment Strategist at Geojit Investments. Views are personal.