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Below the Views on Effect of US Elections on Indian Markets by Nitin Aggarwal Director of Investment Research and Advisory at Client Associates

Key Highlights -Impact on India

• Pharmaceuticals: Indian generic drug exports to the US may face tariff revisions, potentially affecting the pharmaceutical sector.
• IT Sector: A slowdown in US discretionary spending due to trade wars could negatively impact India’s IT exports.
• FPIs: If US interest rate cuts are delayed, FPI inflows into India could diminish, as there is an inverse relationship between US interest rates and FPI flows into emerging markets.
• India’s Monetary Policy: Any delay in US rate cuts could also delay India’s repo rate cuts, prolonging pressures on the Indian economy, which is already seeing a slowdown in earnings growth.

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Views on the Effect of US Elections on Indian Markets

US election results are just two days away from today. The impact of the elections would eventually depend on the outcomes. In case, Democrats return to power, the impact on the global economy, including India, is expected to be minimal as the status quo will continue. However, if Republicans assume power (Trump), we expect the resumption of trade wars led by an increase in tariffs.

Please note that the US economy has been running a high trade deficit for the last few years and the foremost promise of Trump's presidency has been to reduce this deficit burden by levying taxes on goods and services being imported in the US. However, the imposition of tariffs is a double-edged sword as these tariffs might help reduce the trade deficit but will aid inflation on the upside as imported goods will become expensive. Please note that the US economy is already grappling with persisting elevated core inflation for the last few years. Any possible upside on inflation will only delay rate cuts by the US Fed. 

As of now, it is extremely difficult to say as to which all countries will be impacted the most. However, considering the previous presidency of Trump (2016-2020), China will have to bear the major brunt of revise trade policy.  Impact on India 

India’s exports to the US include IT services, Pharmaceutical drugs, and Gems and Jewellery. We envisage that the Pharma sector might be impacted a bit as tariffs for generic medications might get revised (Generic drug manufacturers in India will be impacted). Also, suppose interest rate cuts are delayed in the US. In that case, FPI’s flows into India might further dry up (please note that there is a negative correlation between FPI flows towards emerging economies and interest rates. Lower the interest rates, the higher the inflows towards EM’s). If the US economy slows down as a result of trade wars, then the Indian IT sector will also take a hit as discretionary spending in the US will be negatively impacted (Please note there is a positive correlation between discretionary spending in the US and the Indian IT sector)

Lastly, if interest rate cuts are delayed in the US, then emerging economies like India might witness delay in repo rate cuts as well. Any delay in interest rate cut in India will only widen pressures on the Indian economy, which has recently started witnessing a slowdown in earnings growth

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