The Indian stock market made a sharp recovery in March despite ongoing volatility linked to global tariff concerns. After a steep decline in the first two months of the quarter—primarily driven by Foreign Institutional Investor (FII) outflows—March saw a reversal, helping the Nifty end the quarter flat. Similarly, the rupee remained stable, while government bonds rallied, bringing the 10-year bond yield down to 6.6%.
Small- and mid-cap stocks also rebounded in March, but overall, they remained down for the quarter. The Midcap Index declined by approximately 10%, while the Smallcap Index was down 15%, having fallen more sharply in early March before recovering.
Global Trade and Tariff Concerns
Much of the global economic news has centered on President Trump’s tariff policies. Initially, the U.S. imposed 25% tariffs on steel and aluminum, followed by duties on automobiles, auto parts, and other goods. Additional tariffs, particularly targeting China and other export-driven economies, were scheduled to take effect on April 2.
For decades, the U.S. outsourced manufacturing across various sectors, benefiting from lower production costs abroad. This strategy kept inflation low and fueled consumer demand, which now accounts for 70% of the U.S. economy. Many countries, including Canada, Mexico, and China, became heavily reliant on U.S. imports to sustain their economic growth.
However, the U.S. budget deficit has reached alarming levels. The federal debt-to-GDP ratio stands at 124% and is expected to approach 130% this year. While low bond yields have supported the government so far, this situation is unsustainable even with the U.S. dollar’s reserve currency status. The administration believes tariffs will encourage domestic manufacturing, reduce import dependency, and generate revenue to help manage the budget deficit.
Economic Implications of Tariffs
Although the policy aims to boost domestic industry, tariffs come with significant downsides:
- Short-term inflation: Higher costs will be passed on to consumers, dampening sentiment and spending.
- Uncertain interest rate trends: Inflation may stay elevated longer than expected, affecting interest rate decisions.
- Challenges in reshoring manufacturing: Some industries have shifted production overseas for decades, making a rapid return to U.S. manufacturing unlikely.
- Risk to economic growth: If consumer demand weakens, economic expansion slows, reducing tax revenue and making deficit reduction even more difficult.
A more targeted, moderate approach to tariffs could have balanced revenue generation without disrupting economic growth.
Investment Trends and Market Movements
Over the past two years, global trade trends favored the U.S. dollar and U.S. assets while dampening emerging markets. This trend was reinforced as U.S. stock markets rallied. However, the shift began in late 2024 when Chinese equities rebounded, with the Hang Seng Index returning nearly 45% over the past year.
By early 2025, the U.S. dollar began to weaken, leading to changes in investment flows. After consistent outflows in 2024 and early 2025, Indian markets saw Foreign Portfolio Investors (FPIs) return in March, bringing in nearly ₹30,000 crore.
India’s Macroeconomic Strength
India is currently in a strong macroeconomic position, with:
- A stable balance of payments
- Controlled inflation
- A potential easing of interest rates
- Expectations of economic growth revival
Economic growth last year was hampered by multiple factors, including prolonged elections, subdued consumer demand due to high inflation, stagnant income growth, and reduced government spending. With these challenges easing, growth prospects for the coming year look more optimistic.
While some Indian sectors—such as pharmaceuticals, engineering, gems and jewelry, textiles, and metals—face tariff-related risks, their full impact will become clearer in the coming weeks.
Stock Market Outlook
Despite potential indirect effects of the tariff wars, India remains largely insulated from their direct impact. If global risk premiums rise, investors might reassess valuations for riskier assets. However, considering last year’s low base and expected earnings growth of 13-15% in the next financial year, the Indian market outlook remains positive.
For the current year, large-cap indices have risen by approximately 5%, in line with earnings growth. Consumer demand and government capital expenditure are expected to improve next year, providing additional market support. Corrections due to global events or earnings results could present attractive buying opportunities in Indian equities.
Some sectors will face tariff-driven headwinds, while others will benefit from advancements in artificial intelligence (AI). Contrary to the belief that India lags in AI, the real advantage lies in its ability to effectively implement AI to boost productivity. However, India still has work to do in robotics and automation.
IN CONCLUSION
This is not the end of the bull market but rather a corrective and consolidation phase. Market volatility may persist, but the fundamental outlook remains strong, and the recovery could happen sooner than expected.