India is now facing among the highest US tariffs after the Trump administration imposed an additional 25 per cent US tariffs, over and above 25 per cent imposed earlier. Nuvama in an macro strategy note warned investors that high tariffs will bite, but a global slowdown should inflict a bigger pain.
“Picking winners or losers based on tariff differentials is missing the woods for the weeds. The elephant in the room is the coming narrowing of the US CAD (unwinding of global imbalances)—a deflationary dynamic,” it said,
If India negotiates a lower tariff, it may help but a global slowdown will still hit its exports, Nuvama said adding as the US current account deficit (CAD) narrows, the risk of China’s dumping looms, which would impact sectors not even exposed to US.
“The RBI must ease fast, and a fiscal push is needed too. Any rupee correction is welcome—the best antidote to tariffs/dumping,” it said.
The domestic brokerage believes the orderly rebalancing demands symmetric debtor-creditor adjustments. Else deflation would set in globally.
“Today, as US CAD narrows, it is imperative that: i) the Fed lowers rates, does QE; and ii) China reflates its consumption sizeably. If not, regional trade tensions could flare up,” it warned.
The US 10 -year bond yield is now very close to nominal GDP growth, which often foreshadows an economic slowdown. The market rates need to be lowered, which requires not just rate cuts by the Fed, but also QE, Nuvama said while wondering whether the Fed will oblige.
Trade wars have affected capital flows and asset markets so far. Stock market and currencies gyrated, plunging in response to the ‘Liberation day’ tariffs, rebounding thereafter as Trump opened up to negotiations.
“Effective US tariff is now 18 per cent. Hereon, tariffs would impact trade flows and real economy. In this regard, mainstream analysis is focused on identifying winners/losers based on relative tariff
differentials. This is missing the woods for the weeds,” Nuvama said.
It said global rebalancing is tricky given the risk of asymmetrical adjustments in the debtor (deficit) and creditor (surplus) countries. Markets, it said, can force the debtor to de-leverage (reduce CAD), but cannot force creditor to lever up.
“Thus, a coordinated rebalancing (Bretton Woods/Plaza Accords) delivered a smooth adjustment, whereas spontaneous unwinding was dislocating (GFC/EU crisis). Today, as markets have begun to impose discipline on the biggest debtor—US (high rates, move to gold)—we need: i) easing by G7 central banks (rate cuts, QE); and ii) China’s(creditor) timely, sizeable consumption boost. Any delay could set off a deflationary impulse,” the brokerage said.
Nuvama said tariffs with the US can be negotiated lower in coming weeks. As things stand today, it puts India squarely at a disadvantage vis-à-vis other nations so far as exports to the US are concerned.
The bigger channel of impact on India could still be through the global trade slowdown. This will hit even those segments of India’s exports that are not even exposed to the US, it said.
“Also, the global deflationary impulse could cause further slowdown in India’s NGDP growth and could hurt segments that have nothing to do with exports. Historically, India’s NGDP growth and corporate revenues are strong linked to the global trade growth,” it said.
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