The Latest US Tariffs: Market Ripple Effects for India & MFDs

The 2025 US tariff regime, which involves the imposition of reciprocal tariff duties as high as 26% on Indian exports, has redefined and reshaped the India-US trade landscape and the Indian market. 

With negotiations ongoing and deadlines to reach a mutually favorable agreement between the two nations extended, Indian exporters and investors face a mix of risks and opportunities. This analysis draws on the latest sectoral data and delves deeper into the resulting shifts for Indian markets and mutual funds.

The US-India Tariff Deal: Key Highlights

• Tariff Increase: A uniform 26% tariff was implemented across most Indian exports to the US. Certain sectors, including pharmaceuticals and critical minerals, remain exempt.
• Policy Objective: The measures aim to strengthen US manufacturing and address trade imbalances, which affect India’s annual exports of around $80 billion to the US. India’s trade surplus with the US has grown at a CAGR of 7% over the past decade.
• Negotiation Window: Although there is hope for tariff reduction to 20% by the end of July 2025, uncertainty persists.
• Even if these reciprocal tariffs remain near the 25-26% mark, India still holds a competitive edge over other major exporters such as China, Bangladesh, Vietnam, and Thailand.

• Tariff: 25-26% on both vehicles and parts.
• Effect: India’s leading auto components exporters, dependent on the US for 27% of value, face steep export declines and renegotiated contracts. Smaller, domestically focused firms remain resilient, but supply chain disruptions could still arise.

Ripple Impact on India: A decline in US demand may force Indian suppliers to pivot to EU or ASEAN markets, where standards differ, potentially increasing retooling or certification costs.

Electric vehicle (EV) suppliers may face delays in expansion or contract cancellations if US partners put projects on hold.
Domestic auto sales rise marginally if firms redirect capacity homeward, possibly leading to discounting and pricing wars.

• Tariff: 25% 
• Effect: Exporters would deal with eroding margins, sluggish demand, and a risk of global price correction due to displaced supply. Ancillary units face income stress and operational cuts.

Ripple Impact on India: If India imposes counter-tariffs on China to avoid being flooded with cheap Chinese steel (displaced from the US), domestic steel prices will rise.

This would harm downstream industries, such as construction, real estate, automotive, and infrastructure, due to rising input costs.

• Tariff: 26%.
• Effect: Margin pressure is immediate, risking a 10-12% decline in exports. However, India’s relatively moderate tariff compared to China and Vietnam may offer a strategic advantage in the medium term as buyers diversify sources.

Ripple Impact on India: Domestic brands may benefit as large exporters shift focus to India, improving quality and availability in the local retail market.

• Tariff: Exempted.
• Effect: Secure from new duties, India retains its significant role as a major supplier to the US. Market share may even expand as rivals face higher barriers to entry.

Ripple Impact on India: By being exempted, India may gain market share as its rivals (e.g., China) face higher trade barriers.

• Tariff: 26%.
• Effect: Increased costs and US demand volatility stress the industry. Chemical exporters are urgently seeking alternative markets and revisiting global supply arrangements to offset thinner margins.

Ripple Impact on India:  Indian chemical makers already face high raw material dependency on China. A retaliatory tariff on Chinese inputs could raise production costs.

• Tariff: 26%.
• Effect: Sales to the US, India’s biggest market, could drop 15% or more due to end-customer price sensitivity. Any change to duty-free diamond access would have a profoundly negative impact on India’s trade flows. 

Ripple Impact on India: If the US introduces further restrictions on duty-free access for cut & polished diamonds, the entire Surat-based industry could be hit, as it largely depends on the US for demand. Worst, there could be a temporary increase in smuggling or informal trade as players try to bypass new duties.

• Tariff: 26% on shrimp, fish, honey, rice, processed foods.
• Effect: Marine products and specialty crops, such as honey and tea, experience a significant decline in volume. Specific categories could benefit if the US shifts orders away from China or Vietnam.

Ripple Impact on India: India might target Middle East, Japan, or EU markets to compensate. However, these regions have stricter sanitary standards.

Domestic price drops may harm farmer incomes unless the government intervenes with minimum support prices or subsidies.

Exporters, including those in the auto, metal, and textile sectors, suffered sharp corrections, whereas pharmaceuticals and domestic consumption players outperformed.

• Flows: Despite headline-making risks, mutual fund inflows – especially from systematic investors – remain robust and resilient, displaying retail confidence.
• Sector Allocation: Sector-specific funds exposed to exports have disappointed. Defensive rotation into pharma, chemicals, and domestic themes is evident.
• Long-Term Strategy: Equity mutual funds focus on domestic demand, reducing weight on export risks. Tactical shifts may continue if tariff uncertainty persists, but the resilience of SIP inflow and the potential for a “favourable deal” (better trade negotiations) could drive a rebound.

The 2025 US tariffs have disrupted India’s export map, with diverse effects across industries. Export-reliant sectors, such as autos, gems, metals, and textiles, are under pressure, while pharmaceuticals and select consumer durables are insulated or positioned for opportunities. Financial markets are responding with caution but have not yet seen panic, and mutual funds are demonstrating resilience by adjusting their sectoral exposures. 

The evolving global scenario underscores the need for strategic agility and continued focus on India’s robust domestic growth story as a buffer against global turbulence.