Why are the stock markets falling? No, Trump’s tariffs are not to blame

Why are the markets falling? Are they reacting to trade tariffs planned or announced by President Trump? 

I don’t think tariffs are the most important factor. The most important factors are domestic. The markets are not reacting to the external world only. The reality is that the Indian economy has slowed down a bit in the past six months.

Also, [stock] valuations have been on the higher side, and we have been saying that the mid- and small-cap side of the market was expensive, and a correction was due. If you look at China, it grew at 10% for 35-40 years despite the tariffs that were imposed on it and removed, and various other external factors. Why? Because they got their domestic side of the economy right, they got their housing and urbanisation right, and then the economy sustained itself.

As long as the current account [deficit] is fine, [international crude] oil prices don’t go to [levels of] $200 per barrel, I think the Indian economy is fairly resilient. Tariffs are not a big factor.

Why are foreign portfolio investors (FPIs) continuously pulling out?

If it is the current account that reflects the reality of the economy, there is capital flow that reflects the mood swings of investors and perceived risks and perceived causes – which may not be that relevant. We have been saying for a while that the small- and mid-cap segment of the market was expensive, and that a correction was due. Now if it has happened, many would see as to what happened over the last one month, and ascribe it as a cause. That causal relation may or may not exist, and I wouldn’t attribute it to that.

If you look at some of the selling that has happened in the market, it is not just FIIs. MNC promoters have also chosen to exit. As the valuations were conducive, they felt that they could encash some of the value that they have created. So, it is not just Trump’s tariff threats. It is also the valuation levels of the Indian market that made it relevant for some of these decisions of taking the money out. Also, the economy slowed down over the last six months.

What is the nature of the slowdown, and do you see a fundamental issue there?

There is no fundamental instability in the Indian economy. The current account deficit is fine, the [rate of] inflation is fine, corporate and bank balance sheets are healthy – so there is no fundamental problem in the economy.

The only thing is that there is weak demand. But I think weak demand is an easily solvable problem. Monetary and fiscal policy tools can be used to address that demand. We got some fiscal support in the Union Budget, and I do hope we continue to get more support from the monetary side.

So given that there is no macro instability issue in the Indian economy, given that it is only an issue of demand, and the RBI is supportive of demand, I do believe that the Indian economy will regain momentum. And once it regains momentum, then capital flows will also come back. It may take a quarter or two, but as long as the Monetary Policy (which sets the benchmark interest rate in India) is supportive, there is no reason to believe that the economy will continue to languish.

The only thing I would watch is the housing sector. We need the housing sector to sustain recovery, so I would want housing prices to ease off so that the demand picks up, and the housing activity recovers. So the factors that impact the Indian economy are mostly domestic. If monetary policy support continues and the housing activity recovers, the economy should do well. That’s irrespective of what happens on tariffs.

Will the announcements in the Budget on the income tax cuts help?

Yes, it will lead to…