The Hindu: Published on 13th Feb 2025:
Why in News?
The Indian stock market has been on a six-day losing streak due to several factors, including foreign investor sell-offs, mixed corporate earnings, and fears over increased U.S. tariffs.
U.S. President Donald Trump’s decision to restore and increase tariffs on steel (to 25%) and aluminum has further impacted market sentiment.
Key Highlights
Impact of Trump’s Tariff Policy:
- The U.S. tariff hike aims to protect American industries but has created concerns over increased competition and price pressure in India.
- Indian steel manufacturers, such as JSW Steel, are already witnessing a decline in Net Smelting Return (NSR).
- India’s Directorate General for Trade Remedies (DGTR) is investigating the possible dumping of Asian steel products in India.
Foreign Institutional Investors (FIIs) and Foreign Portfolio Investors (FPIs) Sell-Off:
- FIIs and FPIs are pulling money out of Indian markets and investing in U.S. bonds, which offer better returns.
- Rising U.S. bond yields are attracting foreign capital away from Indian equities, weakening the Indian rupee.
- Persistent inflation above 4%, slow earnings growth, and high valuations in mid-and small-cap stocks are making Indian markets less attractive.
- Market Sentiment and Domestic Factors:
- Indian domestic investors are trying to counterbalance foreign outflows, but overall sentiment remains negative.
- The weak performance of mid-and small-cap stocks indicates market-wide corrections.
Impact/Implications
On the Indian Economy:
Increased tariffs by the U.S. could make Indian exports less competitive, affecting industries such as steel and aluminum.
The weakening rupee against the dollar may lead to higher import costs, further fueling inflation.
On Indian Markets:
Continuous FII selling has created downward pressure on stock indices, affecting investor confidence.
A potential trade war and geopolitical tensions could add to market volatility.
On Global Trade Relations:
India may need to revisit trade policies and explore alternatives to counter the negative effects of U.S. protectionism.
Increased dumping from Asian markets could put pressure on domestic manufacturers.
Challenges/Concerns
Uncertainty around U.S. Trade Policy: Investors remain cautious as Trump’s tariff policies could lead to retaliatory measures and trade wars.
Fluctuations in Foreign Investment: If foreign outflows continue, it could further weaken Indian markets and the rupee.
Inflation and Economic Growth: High inflation and slowing earnings growth could make Indian stocks less attractive in the short term.
Way Forward
Government Measures: India may need to consider protective policies, such as anti-dumping duties, to safeguard domestic industries.
Market Stability: Encouraging domestic investments and strengthening investor confidence through policy stability could help mitigate risks.
Monitoring Global Trends: Keeping a close watch on U.S. trade policies and global economic trends will be crucial for market players.
Conclusion
The downturn in Indian markets is driven by a combination of external factors (U.S. tariffs, rising bond yields) and internal challenges (FII outflows, inflation, slow earnings growth). While foreign investment may return in the long term, uncertainty remains a major risk in the near future.
