What Trump's re-election means for India, debt market and your investments

Trump's policies can be positive for US growth but can lead to slower growth, currency volatility in other economies.

 

Trump’s re-election presents both opportunities and risks for India. While there could be short-term challenges, particularly from a stronger US dollar, rising interest rates, and potential capital outflows, India stands to benefit from global supply chain shifts, with key sectors like IT, pharma, and manufacturing positioned to gain. 

 

Trump's protectionist trade policies might continue to push businesses to diversify production outside China, giving India an edge while on the downside India may face higher borrowing costs, inflationary pressures, and a weaker rupee, which could affect consumer sentiment and business costs in the short term.

 

For investors, it will be crucial to monitor sector-specific trends, focusing on export-oriented and FDI-driven industries. 

 

 

Axis Mutual Fund decodes what a Trump victory means for India: 

 

Trump has proposed “America First” policies, such as lowering corporate taxes, imposing higher tariffs on China and rest of the world, and incentivizing local manufacturing, are expansionary and positive for its economic growth. However, these measures could lead to higher inflation and in effect higher interest rates, higher bond yields, and a stronger US dollar. Many emerging market currencies, including the rupee, are already under  pressure and currently at an all-time low. 

 

Tariffs: One of the key impacts could be tariffs by the Trump government that could have repercussions on countries such as China and Mexico. However, India and the US have had deep economic and strategic interests for long that are unlikely to be compromised due to the electoral outcome. Any trade tariffs on China indirectly benefits India through China +1 strategy as was the case in 2016. The US administration may revoke China's most-favored nation (MFN) status, which may benefit India as a preferred partner to the US.

 

India gained 5% ($31bn) market share in US incremental imports since CY18 (the first tariff against China began in 2018) 

 

 

Expect higher interest rates

India is likely to face a higher fiscal deficit this year, a scenario that could drive higher interest rates as the government ramps up borrowing to fund its spending. A larger fiscal deficit generally signals more government debt issuance, which can push bond yields higher, leading to increased borrowing costs. Alongside this, the US dollar has strengthened by 4% since its low on September 27, 2024, which means higher yields and a stronger dollar will exert pressure on emerging markets, including India.  Higher fiscal deficit and a stronger dollar may keep interest rates higher

 

A stronger dollar has been a key factor in pushing Asian currencies lower, but the Indian rupee has remained relatively stable compared to its regional counterparts. India’s foreign exchange reserves are strong, covering about one year’s worth of projected imports, which offers reassurance that India can weather external shocks. However, the combination of rising yields and a stronger dollar may still challenge India’s external sector in the near term, as it impacts capital flows and the cost of imports.

 

While higher yields and a stronger dollar are negative for Asian economies, India has demonstrated resilience in the global trade arena. Since 2018, when the US-China trade war began, India has gained around 5% market share in US incremental imports, or roughly $31 billion. This is significant, as it suggests that India has been able to capitalize on the shifts in global supply chains, particularly those moving away from China.

 

Ashish Gupta, Chief Investment Officer at Axis Asset Management, highlights that while it’s still early to fully assess the impact of new US government policies, India’s structural drivers remain robust over the long term. The growing strategic partnership between India and the US, alongside India’s manufacturing focus under Make in India, positions the country to benefit from global shifts, particularly if negative developments in China lead to redirected foreign investment.

 

Interest Rates: A Fine Balancing Act

In the short term, India’s inflation could rise, and the Reserve Bank of India (RBI) might continue its pause on rate hikes in its December monetary policy. However, market analysts expect the RBI to eventually reduce interest rates by around 50 basis points over the next year, aided by favorable demand-supply dynamics and controlled inflation expectations.

 

A higher fiscal deficit may prompt the government to keep interest rates elevated in the near term, especially if borrowing needs increase. This scenario would make loans more expensive and could delay the interest rate cycle.

 

Sectoral Impact: Winners and Losers

 

IT Services: Indian IT firms are less reliant on visas compared to competitors, with many companies employing 55-60% US citizens or green card holders. This puts Indian firms in a strong position as the US focuses on increasing legal immigration. Additionally, India’s IT services sector could benefit from increased demand as US companies outsource more in the wake of trade tensions with China.

 

Pharma: A weaker rupee could benefit Indian pharmaceutical companies, especially those that produce low-cost generic drugs. The new US government’s stance on drug pricing could also provide a favorable environment for Indian pharma exports, as the sector is well-equipped to meet global demands.

 

Energy: Falling oil prices are a boon for India, helping to manage both the current account and fiscal deficits. India’s energy import bill has been a key pressure point in its external finances, and lower oil prices can provide significant relief in controlling the twin deficits.

 

Manufacturing: Indian manufacturers, particularly in semiconductors, mobile phones, and printed circuit boards, stand to benefit from Make in India initiatives. This is particularly relevant as global supply chains seek diversification away from China, positioning India as an attractive manufacturing hub.

 

"Although it is early to predict the exact impact of the new US government policies on Indian markets, India has been a strategic partner for the US and this is unlikely to change. In the short term, the focus will be on how these policies and measures play out and their impact on the global economy. Overall, India’s structural drivers remain on a strong footing over the longer term. Any negative developments in China could potentially redirect foreign investments to India and bode well for our manufacturers. Stronger USD and higher US bond yields would likely keep overall flows to EMs (including India) muted in the near term. Given the large pipeline of equity supply over the next few months, this will be a headwind for the equity markets. Earnings outlook and valuations remain crucial for India, and the long-term performance of Indian equities is more influenced by the domestic economy than by global factors," said Ashish Gupta, Chief Investment Officer, Axis Asset Management.