Markets Rebound As They Brace For Tariffs
The markets rebounded as buying picked up once again with the markets debating how to digest the latest round of potential tariff hikes
On Episode 547 of The Core Report, financial journalist Govindraj Ethiraj talks to Mohit Makhija, Senior Director at Crisil Ratings. We also feature an excerpt from our recent interview with RS Subramanian, Senior Vice President (South Asia) at DHL Express.
SHOW NOTES
(00:00) The Take: The Trump Tariff Breakdown
(05:38) Markets Rebound As They Brace For Tariffs
(11:31) Car companies hike prices as demand continues to be tepid
(13:24) India is seeing a bond buying frenzy ahead of a rate cut
(14:22) Why India’s Cables & WIres sector is seeing massive growth and investments
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
—
Good morning, it's Thursday, the 3rd of April, and this is Govindraj Ethiraj Headquarter and broadcasting and streaming from Mumbai, India's financial capital, and welcome, in many ways, to a new global order.
The Take
Before we get down to the details, there are a few takeaways at this point.
Firstly, India has been hit by a 26% tariff by the United States of America in what that country has called discounted reciprocal tariffs. Now, that number has to be seen in contrast. Relative tariffs matter, and if India is hit by even slightly lower tariffs than other exporting countries for the same product, then it has a possible advantage.
Second, negotiations are still ongoing, which does, of course, make the uncertainty worse, but then the good news is that things could get potentially better from here. And finally, even if India is at a relative tariff advantage, it's not clear how higher prices will affect consumption, as it is sure to, so that is something that we have to see how it plays out. Now, let's come to the details.
Donald Trump, on Wednesday, said he will apply a minimum 10% tariff on all exporters to the United States and slap additional duties on around 60 countries with the largest trade imbalances with the US. Now, that includes substantially higher rates on some of the country's biggest trading partners, like China, which now faces a tariff that goes up to 54% on several goods. The baseline import tariffs will kick off on midnight of Saturday, and the higher duties will kick in on the 9th of April, according to a White House statement.
Canada and Mexico already face 25% tariffs, and those will remain in place, and they will not be subject to any new tariff regime, says Bloomberg. The move obviously marks a big escalation in the trade war, threatening to draw immediate retaliation from US trading partners, and is also a stark break from a decades-long effort following World War II to lower trade barriers as a way to foster commercial ties between nations and prevent armed conflicts, according to Bloomberg. The announcement set off declines of more than 2% in equity benchmarks that had rallied for days on hopes his plan would be more lenient.
So that's another area, or once more, that the markets have clearly got the current administration's economic strategy wrong. A senior fellow at the Peterson Institute for International Economics told Bloomberg that the tariffs that were announced were much worse than what they feared, but just how they would be administered was unclear, and that there were huge implications for rerouting of trade globally. A tariff rate of 54% on goods from China could lead to a 90% decrease in exports to the US in five years, according to previous estimates by Bloomberg Economics.
The European Union will have a 20% levy, and Vietnam is 46%, thus obviously affecting products that are being exported from Vietnam, or in some cases, as alleged Chinese companies who are manufacturing in Vietnam and then exporting outwards. Others hit with high tariffs include Japan at 24%, South Korea 25%, Cambodia 49%, Taiwan 32%, and India, of course, 26%. Treasury Secretary Scott Besant urged trading partners against taking retaliatory steps, and he said that I wouldn't try to retaliate in an interview to Bloomberg Television, and as long as you don't retaliate, this is the high end of the number.
He also said that this is the high end of the number, barring retaliation, and as far as negotiations go, we'll see. The Federation of Indian Export Organisations told PTI that 26% import duty will undoubtedly affect domestic players. Ajay Sahai, the Director General, said that India is much better placed than many other countries and expressed hope that the proposed bilateral trade agreement would be concluded at the earliest, as it would provide relief from these reciprocal tariffs, hinting obviously that from here on, things could get better, at least for countries like India, who are not looking at counter tariffs.
He also said that we have to assess the impact, but looking at the reciprocal tariffs imposed on other countries, we are in a lower band compared to key competitors like Vietnam, China, Indonesia, Myanmar. Prabhu Damodaran, Convener of the Coimbatore-based Indian Text Proniers Association, which represents government and apparent exporters, told The Core Report this morning that the tariffs are a medium to long-term opportunity for India. He pointed out that India's tariff is 26%, which is significantly lower than competing nations like Vietnam at 46%, Sri Lanka at 44%, Bangladesh at 37%, and China at 34%.
While in the past, India, Vietnam, and Bangladesh were charged similar for cotton apparel. This gives India a clear advantage in cost competitiveness, particularly in textiles and apparel, and thus India is well positioned to expand its market share in the US. He also said that ongoing trade negotiations could further enhance India's position, particularly if India offers zero-duty import of cotton in return for sector-specific benefits and apparel exports.
Now, the big question mark for all products that are imported into India is, of course, to see how consumers respond and whether they will continue to buy at the same intensity at higher prices. And that, of course, seems logically tough to expect. So, the response of US consumers, including sentiment and consumption behaviour, will obviously impact all of these export trends, whether it's for India or other countries, even though India could be at an advantage.
Our Top Stories and Themes
The stock markets rebound as they brace for the first major tariff hit.
India is seeing a bond buying frenzy ahead of a rate cut.
Car companies hike prices as demand continues to be tepid.
And why India's cable and wire sector is seeing massive growth and investments.
Markets Rebound
The stock markets rebounded as buying picked up once again with the markets now debating how to digest the latest round of potential tariff hikes, the details of which were not known during the trading day. The difference this time is there will be some impact on Indian exports and imports. Exports like auto components and pharmaceuticals could be hit, and while India may have to make more concessions than originally thought of on imports of products made in the United States.
Remember, auto components were already hit and more sectors could be covered. Meanwhile, the domestic market is expecting to see more liquidity, including thanks to a potential interest rate cut, which in turn is expected to drive more consumption and more on that shortly. On Wednesday, the Sensex was up 592 points to close at 76,617.
And the NSE Nifty 50 was at 23,332, that's up 166 points. Broader indices were strong too, with mid and small cap shares closing higher by over 1% each. Now, back to tariffs.
While there could be some tariff impact, the market believed that it will not be or may not be as bad as originally feared, precisely because there has been frenetic negotiations happening and India clearly willing to and giving in on several demands from the United States. Though not all, and that is perhaps where the problem could be. It is not clear whether India will budge on areas linked to agriculture and dairy, and even if so, to what extent that would happen.
And finally, even if all of that happens, would that have a market impact? On the other hand, there is confusion, at least going by all the reporting on whether the final cut was a Wednesday early morning US time and late night India time, whether it would be strictly reciprocal as promised or 20% sweeping tariffs. Either way, it's about 20 countries that would see most of the action, including of course, India and China.
Meanwhile, India's manufacturing PMI for March hit an eight month high, leading to some speculation about a recovery in the fourth quarter corporate earnings. That's the quarter that just went past. While that is a possibility, it is tough at least for the core report to separate hope from actual data, since the hope is there for all to see, including depending on more consumption, thanks to income tax cuts, but the data is still to catch up.
Meanwhile, the rupee closed a little weaker on Wednesday, ending at about 85 rupees 49 paise, down slightly from 85 rupees 47 paise in the previous session. The expectation now is that the rupee will be steady in the coming days. Reuters quoted a Bank of America global research note to say that while the rupee would be vulnerable to a headline risk around tariffs, it expects limited impact over the medium term.
India will be more resilient to Trump tariffs than other emerging markets, driven by constructive domestic factors, according to JPMorgan Private Bank. They also said that they see a bottoming of economic momentum in sight.
—
Last stage attempts to woo US trade negotiators were on. One example, which may not have been the last stage, but definitely in the run up, was to lower import tariffs on electric cars, and thus rejecting lobbying by local auto companies like Mahindra and Tata, presumably, to delay such cuts by four years, according to Reuters. Now, the move, of course, is not surprising, given the clout Trump confidant Elon Musk wails within the US government right now, and something that we've been reporting on at the core of the report steadily. Reuters said auto companies are lobbying the Indian government to delay any cut in EV tariffs until 2029, and then phase in a reduction to 30% from as high as about 100% right now.
Both Tata and Mahindra have invested in EV manufacturing capacity locally, and have also rolled out electric models, with Mahindra just having launched and announced a new range. Tata has launched their first, that's the Nexon EV, in January 2020, so it's more than five years. India's EV sales, which are dominated by Tata Motors, are still only about 2.5% of total car sales, which stood at about 4.3 million, or just over 4 million in 2024. Now, the government has targeted to take this to about 30% by 2030, that's in five years' time. Car makers are saying that their EV investments are tied to incentive programmes for local manufacturing that runs till 2029, and allowing cheaper imports before that would hurt their competitiveness, according to the Reuters report.
How Ready Are Indian Business Leaders?
So the larger question in some ways is how ready is Indian business to take on the challenges that are now present and will be around for some time? Remember, even the latest round of tariffs are not necessarily the final ones. We could see the tariffs would hang and swing for some time to come, months or even years, going by recent developments and the uncertainty.
Over the weekend, I had spoken to DHL Express, India managing director, RS Subramanian, and I asked him how organisations like his were gearing up for the logistics chaos that would follow, and more importantly, how are companies gearing up from their vantage point, since they work with so many of them, both on the import and export front?
TRANSCRIPT
RS Subramanian: I think for the kind of network we run and the scale and size of presence across the globe, I think on any given day, there are many wars happening. Yeah, so every day is an exciting time, and our job, I think, is to run a network which brings peace to the boardrooms which are in a tense moment. But having said that, some of the dynamic calls, wars possibly happen in customers' boardrooms, and we are there to support the changes which they want.
Current situations are far more dramatic, but something like this is happening almost every month. Tariff changes, cross-border regulatory changes, new developments which are expected to come. Many times it comes with lead time, and therefore there is time for it to prepare.
Currently there is lead time, but the only thing is there is uncertainty about what might happen, and that puts a twist into the whole tale. I was discussing with some of my colleagues in the network elsewhere, and a lot of our customers, especially in Asia, are also discussing various scenarios in terms of what might happen to tariffs, and if the tariff changes a little bit, or tariff completely creates a barrier, or if there are certain kinds of sanctions, what categories will get affected, how will the supply chains change, and what kind of actions which they need to initiate to ensure that there is business continuity. And as a logistic service provider, in each of the scenarios, there are a few things which we can do to support, and possibly in some cases, we are able to be part of the solution development process, and I think we participate actively.
But it's enough uncertainty for anybody to be able to put their finger on it, and then say, coming next few weeks, these are the actions I'm going to initiate. I think it's still time to wait and watch. A large number of people in India, when you speak to them, are waiting and watching.
More importantly, I was quite impressed by, there seems to be an innate confidence that we will manage. Yeah, it is a combination of what our business will do, business guys will do, and some amount of confidence on how the government is also maneuvering its way, maybe based on how they've managed the last few years. And the last few years were not easy.
There were enough challenges, but I think we found the right...
Govindraj Ethiraj: And we're already reducing tariffs, since the budget has been consistently here.
RS Subramanian: We're saying that we're flexible, and we'll find our way. And the general expectation is that we'll find our way. So in that sense, the nervousness is slightly less here.
There are some parts of the world where more warm preparation is needed.
Car Companies Are Hiking Prices
Car companies are now hiking prices of their cars, having mostly concluded that small discounts would not make much of a difference to the sales numbers, and they would have to wait for base demand to pick up again. Meanwhile, the costs have risen, and quite likely they cannot hold out and on further. Maruti Suzuki said yesterday they were hiking the prices of some of their models from next week.
One of them is Grand Vitara, which will see a price hike of about 62,000 rupees, and the prices of the Grand Vitara start at about 11.1 lakh. In the last month, at least three car makers, Maruti Suzuki, Mahindra and Tata Motors had all announced price hikes, attributing it to rising raw material and operational costs.
Manufacturing Activity Is Up
India's manufacturing activity expanded at the fastest pace in eight months in March, rebounding from a more than one year low due to strong domestic demand, while output inflation declined to its lowest in a year. The HSBC India Manufacturing Purchasing Manager's Index, or PMI, compiled by S&P Global, jumped to 58.1 in March from 56.3 in February, which was higher than a preliminary estimate, which was slightly lower. Both new orders, which is an important gauge of demand, as well as output, increased at the quickest rate since July, though export orders expanded at the slowest rate in three months, suggesting slowing global demand, according to a Reuters report.
HSBC also pointed out that strong demand prompted firms to tap into their inventories, causing the fastest drop in finished goods stocks in over three years. Around 30% of survey participants expected higher output over the coming year, compared with less than 2% who were anticipating a contraction. The Reserve Bank is expected to deliver another rate cut on April 9th, according to a Reuters poll.
There's A Bond Frenzy
Indian bonds rallied the most in more than two years after the Reserve Bank announced larger-than-expected debt purchases, reinforcing the speculation of an interest rate cut in coming days, or rather specifically, April 9th. The 10-year yield fell as much as 10 basis points to 6.48% on Wednesday, which is the lowest since January 22, and it's also the steepest since November of that year. That's 2022, according to Bloomberg.
The roughly 80,000 crore rupees, or $9 billion of purchases, announced late Tuesday adds to more than $70 billion of cash injections by the Reserve Bank that's helped erase a months-long cash deficit in the banking system, according to Bloomberg. Tuesday's announcement also gave bond traders returning from a two-day holiday another reason to push yields lower, says Bloomberg, and the timing was significant, coming on the heels of data showing banking system liquidity had swung back to a surplus for the first time this year.
Booming Cables And Wires
Sometimes the booming sectors are those you don't exactly see. Now, cables and wires have been a hot sector for some time, but the market for them is now growing even faster into areas like power generation from traditional large consumers like construction. Rising demand here obviously also suggests that the overlying sectors are also showing growth are set or are set to show growth.
A new Crystal Ratings report says organised cables and wire manufacturers are set to see a successive mid-team growth next fiscal, building on an estimated 16% increase in fiscal 25. That's 24-25, that's just ended. Now, this would be on the back of rising investment in end-user segments like power generation and transmission, railways, and real estate in domestic markets.
That's more than 90% of revenues and a leg up from China plus one strategy being implemented by some of the countries. And there's an interesting part there, which I'll come to. Capacity utilisation is 80 to 85% in fiscal 24, that's the year before, and healthy growth prospects led to capital expenditure going almost 70% in the last year, and that's expected to continue.
At least the capital expenditure is expected to continue. Crystal looked at about 13 cables and wire companies accounting for about 65% of the sector's revenue of about 80,000 crore rupees. Now, exports are also expected to be strong, around 20 to 22%.
Interestingly, Indian players are apparently being increasingly preferred over their Chinese counterparts, thanks to their expanding product range and adherence to global quality standards. And coming back to that capacity expansion, the industry is expected to see about 40% more capacity being added in the coming year. I reached out to Mohit Makhija, Senior Director at Crystal Ratings, who also pointed out that India's combined spend on power, railways, and real estate is expected to rise 25% to about 9 lakh crore rupees, or 9 trillion rupees in fiscal 2026.
This includes about 50 gigawatts of power generation, 10,000 line kilometres of interstate transmission systems, and CAPEX in railways, metro expansion, and real estate. The metro expansion and railways is something that we can see right here in Mumbai, as we hope for some of those lines to start working by mid-year, at least in central and south Mumbai. All of this is expected to generate demand of about 20,000 crores for the wire and cable industry in 2026.
INTERVIEW TRANSCRIPT
Mohit Makhija: The electrical cable and wire industry, typically, if I were to explain it in a very crude way, they roughly grow at a rate which is double the pace of our GDP growth. So far, GDP is growing at about 6% to 7%. In this industry, normally, we have seen growth happening at a double or maybe two times the GDP growth rate, about 14, 15%.
And this we have seen even during, if we consider the last five years, period of 19 to 24, FY 19 to 24, it's been around that range when there was some COVID-related fluctuations as well. So what makes this sector in focus or different is that this time what we are looking at is that we are seeing a little bit of increased spending happening across three major end-user industries of this product. One is power generation transmission, second is railways, and third is the real estate sector.
Now, if you look at all three sectors, the spends that the government is looking to put in and the private players are looking to put in, we are looking at a cumulative spend of close to nine lakh crores. We expect GDP growth rate to be about 6.5% for next financial year. So with the confluence of these three sectors doing well, along with the general growth that we have seen in the industry, we expect about 15 to 16% growth to sustain over the next fiscal as well.
Govindraj Ethiraj: Right, and I'm gonna come to capacity in a moment. So are you saying that we are seeing more growth now than let's say in the last five years or five years ago, or are there shifts taking place? For example, you talked about power generation versus railways versus real estate.
Mohit Makhija: So there is both happening. There is a little bit of shift happening. We are seeing more focus of the government on power generation.
So if you look at the statistics, we have added about 25 gigawatt of capacity per year. I'm talking about maybe the last 10 years on average. What we are now saying, and this is based on what industry is also saying, we are looking to increase the pace of power generation by another 20 gigawatts.
So we are talking about 45 to 55 gigawatt. I mean, I'm taking a lower base, say 45 gigawatt. That is one shift.
Thermal power additions are leading that, and that is one of the consumers of electrical and power cables. Second also is railways. If you look at the railway budget, it's about 2.65 lakh crore that they are spending, which includes modernisation, laying of new tracks, rolling stock. We are talking about instrumentation and control segments where there are going to be improved signalling systems. So all this is going to lead to a higher demand for electrical cables and wires. Real estate is anyway doing well for the last four or five years.
Govindraj Ethiraj: And I'm assuming all cables and wires are not different because the ones, let's say, that you're feeding into the power sector may be obviously bigger cables going longer distances versus real estate, which is more maybe in-house, in-building and so on. So how does that market wake up?
Mohit Makhija: If we look at power cables, we divide it into power cables and wires. So household wires are maybe about 25% of the industry, about 75% of the industry is power cables. And within power cables, there are transmission cables, there are cables used for power generation.
So from extra high voltage to low voltage is the range. So from a value perspective, the value of extra high voltage cables is far higher than the household segment. So maybe from a volume perspective, I may not have the figures ready, but I think from a value perspective, you can roughly say about 70% of the industry is power cables and about 30% is wires.
Govindraj Ethiraj: And you've also talked about in your report that you put out on this theme about exports and how Indian players are increasingly being preferred over Chinese counterparts. So tell us about that market.
Mohit Makhija: So that is a very small market as of now. We are talking about sales of less than 10%, which goes into exports. But it is a segment which is gradually becoming of interest as players in India are expanding their product range and they are increasingly going for global certifications, that market is available.
But that market is not, I would say while it is growing at a much higher pace, so if domestically we are growing at 15 to 16% next year, that market is growing at about 20%. But that market requires a lot of, there is a gestation period, there is a trial and testing period. And some of the larger players are eyeing that market, may not be the mid and the small categories in cable manufacturing, but that market is seeing traction because companies want to diversify, they want to have a China plus one diversification, which is leading to opportunities for Indian players to export.
Govindraj Ethiraj: Right, I started off by asking you about the new capacity announcements that we've been seeing. Now, how does that, or will it change the dynamics of the industry? You talked about a double GDP growth, so maybe 14%, let's say a growth in the industry, but we are also gonna see a lot of new capacity coming, going by the announcement.
So could that change anything or how are you seeing it?
Mohit Makhija: Well, not in the short term, some of the announcements, some new capacities coming up or greenfield capacities coming up can take some time. But I think on an average, if you ask the numbers, we have seen about 5,000 crore of spending happening between financial year 22 to 24. So between these two years, we have seen about 5,000 crore of capacities coming up.
And for 25 and 26, financial 25 and 26, we are seeing a bump up in this to about 8,000 to 8,500 crore. This includes brownfield expansions as well. So definitely, this is a positive reflection of the growth of the sector in India.
One of the things that we normally track is how much is the capacity utilisation rate. So if you look at the capacity utilisation rate of the sector, currently it is at a higher level of say 80 to 85% in the cable and wires category. And normally we see the levels to be about 75 odd percent, 70, maybe 75 is the top in between that.
So obviously with this new addition of capacities, we will see some reduction in capacity utilisation levels, but it is normal. I mean, it is something which is acceptable to the industry because some of the players are even operating at more than 90% today. So this capacity addition makes sense.
And if I go back to the three drivers, which is power generation, transmission, railways and real estate, all these segments are segments where there is a change which is irreversible. We are going towards Vande Bharat trains. We are going towards modernisation of our railway stations.
Aspiration-wise, the Indian consumption story is going towards a higher degree of consumption in most of the products that we use, whether it is consumer durables or real estate. So I think this is an irreversible change that we are seeing. And that is why I think the manufacturers are positive about investments in this sector.
Govindraj Ethiraj: Right, Mohit, thank you so much for joining me.
Mohit Makhija: Thank you very much.
