Stock market plummets after Trump imposes 25% tariff on Indian commodities, sparking concerns over trade conflict and causing market chaos
In a surprising turn of events, the U.S. President announced a 25% tariff on Indian exports, causing India's key equity indices to plunge. The BSE Sensex opened 335.71 points down, and the NSE Nifty dipped by 114.15 points.
Despite this trade tension, the Reserve Bank of India has held its FY25 GDP growth estimate at 6.5%. However, analysts warn that the doubling of tariffs has the potential to spook foreign institutional investors and result in capital outflows in the medium term.
The tariffs mainly target labor-intensive export sectors such as textiles, gems and jewellery, marine products, auto components, and agriculture. These sectors represent a large share of India’s merchandise exports to the U.S., amounting to around $35 billion in potential export losses. This reduction could dampen export earnings, slow growth in affected sectors, and lead to slower overall economic growth.
Research firms like CreditSights project that doubling tariffs from 25% to 50% could reduce India’s GDP growth by approximately 0.2 percentage points in FY26 and 0.4 percentage points in FY27. Another estimate suggests the drag could reach nearly 0.5 percentage points, which is significant but not catastrophic for the economy.
Investor sentiment has already shown strains, with foreign portfolio investors withdrawing about $4 billion from Indian equities in July and August 2025. Foreign direct investment inflows are also weakening, which could exacerbate market volatility and slow capital formation without policy intervention.
However, domestic private consumption and capital investment remain strong growth drivers, limiting the overall economic damage. There is also a possibility of tariff negotiations that could reduce the effective rate or mitigate these effects.
The increased U.S. tariffs on Indian exports are expected to have a negative but manageable impact on India’s GDP, economy, and stock markets. The stock markets have reacted negatively, reflecting investor concerns about the trade shock. However, the overall impact on India’s economy is expected to be constrained by the limited share of these exports in total GDP and ongoing domestic demand strength.
Sustained policy uncertainty can sabotage the optimism surrounding India's economic upturn. Analysts warn that if the tariffs continue for a year, they could potentially reduce India's GDP growth by 30 to 40 basis points. Market observers are waiting for policy signals from New Delhi and Washington.
Meanwhile, the attention now turns to the Reserve Bank of India's monetary policy. Gift Nifty futures had a weak opening, marking a downward trend in the market. On the other hand, the MSCI Asia Pacific Index rose by 0.8%, with Samsung Electronics up 1.9% and Taiwan Semiconductor rising by 4.4%.
References: [1] Mishra, S., & Jha, A. (2025, August 1). U.S. tariff hike: What India's exporters stand to lose. The Economic Times. [2] Krishnan, S. (2025, August 2). U.S. tariff increase: Impact on India's economy and stock markets. Business Standard. [4] Chakraborty, A. (2025, August 3). U.S. tariff increase: A closer look at the sectors affected. The Hindu BusinessLine.
- The increase in U.S. tariffs on Indian exports could potentially reduce India's GDP growth by 30 to 40 basis points if they continue for a year, according to market analysts.
- Domestic private consumption and capital investment remain strong growth drivers for India's economy, limiting the overall economic damage caused by the tariffs.
- Research firms like CreditSights project that doubling tariffs from 25% to 50% could reduce India’s GDP growth by approximately 0.4 percentage points in FY27.
- Foreign portfolio investors have withdrawn about $4 billion from Indian equities in July and August 2025 due to investor sentiment strains caused by the tariffs.
- The Asian stock market performed mixed, with the MSCI Asia Pacific Index rising by 0.8%, while the Indian stock market, represented by the Nifty, showed a downward trend, reflecting investor concerns about the trade shock.
