Even as the United States’ sweeping tariff hike rattles global trade dynamics, market analysts believe India is relatively better positioned among emerging markets. However, despite this relative resilience, foreign institutional investors (FIIs) may remain wary of Indian equities in the near term. Their hesitation, analysts say, has more to do with stretched valuations and persistent earnings downgrades than with direct fallout from the new US tariff regime.
India’s 26% Tariff: Lighter Than Peers, But FII Sentiment Hinges on Fundamentals
As part of his “Liberation Day” economic overhaul, US President Donald Trump imposed an additional ad valorem duty of 10% on all imports, with higher country-specific tariffs kicking in from April 9. India has been hit with a 26% reciprocal tariff, significantly lower than the 34% slapped on China and Vietnam, and steeper levies applied to Taiwan and the European Union.
While this lower rate may cushion India’s trade exposure in relative terms, the broader context of elevated equity valuations and earnings estimate cuts remains a substantial deterrent for international funds seeking attractive risk-adjusted returns.
According to multiple market strategists, valuation concerns have consistently kept FIIs cautious, especially in sectors like consumer goods, pharmaceuticals, and financials—segments that have seen strong rallies but now face potential margin pressure due to global slowdown fears, inflationary costs, and geopolitical tensions.
Highlights:
India faces a 26% tariff from the US, compared to 34% on China and others
FIIs remain concerned about India’s high equity valuations
Persistent earnings downgrades continue to weigh on market sentiment
Global Market Reactions: Volatility Deepens as Tariff Timeline Begins
On April 2, the date Trump dubbed as “Liberation Day,” markets across the globe traded cautiously amid partial closures due to local holidays, including in Asia and Europe, resulting in muted reactions before the White House detailed the tariff rollout. Once full details emerged, investor sentiment soured, with Wall Street and European futures falling sharply in the following sessions.
This underscores the interconnected nature of financial markets, where policy actions in one region send shockwaves through global capital flows. While emerging markets generally suffered due to their trade dependence and dollar-sensitivity, India’s case was seen as more insulated due to its large domestic consumption base, lower export reliance, and a diversified service-led economy.
However, that insulation has limits. As commodity prices react, especially metals and oil, India could face import inflation, worsening the already stressed fiscal and current account situation, thereby pressuring the rupee and increasing the cost of capital for corporates.
Highlights:
Global indices traded cautiously on April 2 due to limited market activity
Full tariff details later triggered sharp corrections in US and EU markets
India’s lower export dependence offers some cushion, but import cost risks loom
Foreign Fund Flow Outlook: Valuations, Currency, and Growth to Determine Direction
FIIs, who were net buyers in Indian equities for most of the previous quarter, have now turned net sellers, booking profits as earnings disappointments in key sectors started showing up in recent results. The rupee’s vulnerability to rising oil prices and a strengthening US dollar further adds to investor caution.
Several fund managers also noted that India’s political risk premium has risen in light of the upcoming general elections, leading to a preference for markets with clearer near-term policy visibility. While India’s long-term macro story remains intact, the short-term alignment of valuations, policy risks, and tariff impacts will dictate FII flows going forward.
Highlights:
FIIs have turned net sellers amid earnings misses and valuation concerns
Weak rupee and rising oil prices increase macro risk perceptions
Political uncertainty ahead of elections adds to foreign investor caution
As the global tariff war escalates, India’s relative resilience among emerging markets may help it outperform peers. However, sustained FII inflows will hinge not just on global comparisons but on India’s ability to deliver credible earnings, maintain macro stability, and provide policy clarity in a volatile external environment.
