Trump’s dual shocks thwart bets on Indian stock market rebound

Core Viewpoint - The Indian stock market is facing significant challenges due to recent actions by US President Donald Trump, which have negatively impacted investor sentiment and led to a decline in the MSCI India Index [1][2]. Market Performance - The MSCI India Index has experienced a decline in all five sessions following Trump's announcement to overhaul the H-1B visa program, which threatens India's $280 billion software services industry [1] - Prior to these developments, the MSCI India gauge had risen for three consecutive weeks, gaining over 4 percent, marking its longest run since May [2] - The index's decline of approximately 3 percent this week is its largest since February, with IT stocks losing 7.9 percent over five sessions, the most significant drop since April [5] Foreign Investment Trends - Foreign investors have turned net sellers of Indian shares after two weeks of purchases, influenced by the renewed tensions between the US and India [2][3] - In 2025, foreign funds have sold Indian stocks worth around $16 billion on a net basis, potentially marking the second-largest outflow following a record $17 billion withdrawal in 2022 [7] Economic Impact - Changes to the H-1B visa program could reduce remittance inflows and weaken the Indian rupee, which has already been one of Asia's worst-performing currencies [6] - The Indian economy is facing a slowdown in growth and corporate earnings expansion, with the MSCI India gauge rising only about 2 percent this year, lagging behind broader Asian equities by over 19 percentage points [3] Investor Sentiment and Expectations - Investor expectations for a year-end rally have been dampened by Trump's recent actions, despite earlier optimism surrounding tax cuts and trade negotiations with the US [4] - Analysts from Gavekal Research predict continued underperformance of Indian asset prices if the 50 percent tariffs remain in place, which could lead to disappointing economic growth [7] Valuation and Market Positioning - Despite the challenges, some analysts, such as those from HSBC Holdings Plc, have upgraded their stance on Indian stocks to overweight, citing improved valuations and government policy as positive factors [8][9] - The MSCI India gauge is currently trading at 21.8 times its 12-month forward earnings, down from 24.5 a year ago, indicating a shift in market valuation [9] Geopolitical Influence - The near-term outlook for Indian equities, particularly regarding foreign flows, is expected to be heavily influenced by geopolitical factors [10] - Increased hedging costs and a rise in market volatility suggest that traders are preparing for potential market fluctuations due to ongoing geopolitical tensions [11]