Why Mahesh Patil sees opportunity, not panic, in Trump's tariff escalation

US President Donald Trump signed an executive order on Wednesday imposing an additional 25 per cent tariff on goods imported from India. The decision comes on the heels of India’s continuing to purchase Russian oil as a violation of sanctions and a threat to US foreign policy, reports suggest.

 

In a statement released by the White House on Wednesday, the US administration said the decision is a direct response to India's “direct or indirect” import of Russian crude. “The Government of India is currently directly or indirectly importing Russian Federation oil,” the order noted, adding that such imports undermine efforts to isolate Russia amid its ongoing conflict with Ukraine. READ ABOUT IT HERE 

 

 

The new rate will be effective after 21 days and raises announced US tariffs on India to a steep 50 per cent. Similar to the reciprocal tariffs, the penalty excludes products under Section 232 investigation, and will raise the US effective tariff rate on India to 33.8 per cent, from 18.8 per cent previously. Note that pharma and electronics exports (~30 per cent of India’s US exports) are currently exempt.

 

If effective, the steep 50 per cent tariff would be similar to a trade embargo, and will lead to sharp fall in affected export products, especially ones with thinner margins (textiles, gem & jewellery). We had earlier expected  a downside risk of nearly 20bp (basis points) to FY26 GDP (gross domestic product). If these tariffs materialise, then the hit could be higher, depending on their duration.

 

A key question is how India’s government will respond to President Trump’s pressure tactic. The first priority is supporting exporters. On Russia links, the government has so far taken a defiant stance on its oil imports from Russia. The government could look to negotiate with the US, utilising the 21-day reprieve and the upcoming trip of the US trade negotiators

 

The immediate casualty is rupee, which will take the  brunt and this will provide some respite for exporters.  Counter intuitively, fall in InR (once it stabilises) is positive for local earnings and hence equities benefit with a lag.

 

More importantly, we are now par with Brazil, that provides a blueprint- it saw a 6-7 per cent fall from peak before recovering in local terms. Again, whether we will only have a shallow correction or a meaningful one remains to be seen, but for now  we have seen worst of tariff news flow. And in a few months, rates will settle down to more acceptable levels. Any knee jerk correction in the market would be a good opportunity for increasing allocation to equity as the macro and the long term fundamentals of India  are fairly strong. 

 

(Mahesh Patil is CIO, Aditya Birla Sun Life AMC Ltd. Views are his own.)