Sustaining the rise: India's stock markets are hoping for the best outcomes

India’s stock markets responded in counter-intuitive fashion to the tariff war and lukewarm corporate results. The Nifty was up 3.5 per cent month-on-month in April, despite a steep correction around the “Liberation Day”. Domestic institutional investors, including mutual funds, were net buyers to the tune of ₹28,228 crore in April (they invested ₹37,585 crore in March), while foreign portfolio investors (FPIs) invested a net ₹6,190 crore in the same month. Retail investors were also net buyers in direct equity as well as via equity mutual funds. The markets, as a result, rebounded from the lows of the first half of April. The 90-day moratorium on the United States (US) tariffs offers a reprieve and the more optimistic investors are also hoping that the reworking of global supply chains in the wake of the US-China tariff war will result in some manufacturing shifting to India.

 

Further, the Reserve Bank of India (RBI) appears to be on the path of policy easing. This is likely to result in higher valuations for equity, and a shift away from debt. The rupee has recovered from near 88 per dollar to around 84.6 in a volatile scenario. While corporate results for the March quarter and for 2024-25 were lukewarm, companies across several sectors offered cautiously optimistic guidance for 2025-26. Low prices of crude oil, gas, and coal indicate weakness in global demand but, in isolation, low prices of energy are a positive for the Indian economy since India is a large energy importer. The projections of an above-normal monsoon may drive rural consumption, which had recovered to some extent in the second half of the last financial year. Fast-moving consumer goods companies and the auto sector had suffered through the last four quarters from a lack of urban demand, but guidance indicates that firms believe the worst is over and a pickup in urban demand is now around the corner. Some optimism about cheap energy and picking up the slack in terms of export is built around assumptions of continuing global weakness and disruption in supply chains with the US-China faceoff. Many investors are also betting on significant rollbacks of the US tariff regime (ex-China) at the end of the pause period, given strong opposition to punitive tariffs within the US.

 

The alternative scenario, however, is grimmer. The mere threat of tariffs has led to near-recessive conditions in the US and pulled down global growth. If US President Donald Trump does go ahead with his proposed tariffs after the pause, global supply chains will be scrambled and unpredictable effects would be felt across the currency and commodities markets. An extended global recession triggered by a tariff war would undoubtedly have a net negative impact on domestic growth. Plus, there is the shadow of conflict escalation with Pakistan in the context of the terror attack in Kashmir. If all goes well — the Reserve Bank of India continues to cut interest rates, Mr Trump rolls back tariffs, India-Pakistan temperatures cool, there is a decent monsoon, and urban consumption revives — the market is reasonably priced with the Nifty price-to-earnings ratio of 22. But there are a lot of positive assumptions and if any of those does not fructify, there could be another deep correction.