Trump Tariff Shocks Hit Indian Markets
The shockwaves triggered by US President Donald Trump’s tariffs on Canada, Mexico and China hit Indian shores with markets taking a hit
On Episode 498 of The Core Report, financial journalist Govindraj Ethiraj talks to Kunal Sodhani, Vice President, Shinhan Bank as well as Ajay Rotti Founder and CEO of Tax Compass .
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(00:00) Stories of the Day
(00:50) Trump tariff shocks hit Indian markets
(04:17) The rupee takes a sharp knock as the dollar surges
(13:52) The new oil routes that could kick in on Canada and Mexico tariffs. Could India benefit?
(16:21) The Income Tax Department admits it was adversarial earlier but will now move to trust
Signs of policy consistency and certainty in the Union Budget, including in transfer pricing
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].
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Good morning, it's Tuesday, the 4th of February and this is Govindraj Ethiraj, headquartered and broadcasting and streaming like always from Mumbai, India’s financial capital.
The top stories & themes for the day:
Trump tariff shocks hit Indian markets.
The rupee takes a sharp knock as the dollar surges
The new oil routes that could kick in on Canada and Mexico tariffs. Could India benefit ?
The Income Tax Department admits it was adversarial earlier but will now move to trust.
Signs of policy consistency and certainty in the Union Budget, including in transfer pricing.
Markets
The shockwaves triggered by US President Donald Trump’s tariffs on Canada, Mexico and China hit Indian shores with markets taking a hit.
While the markets had flatlined on Saturday, given that the budget did not have specific incentives for investors, the underlying trend in the last few days has been somewhat positive.
Also, because institutional investors have begun bargain hunting, including for large cap stocks, it would appear.
The tariff move has of course created havoc with everything and everyone’s calculations.
The BSE Sensex fell 319.22 points to settle at 77,186.74 while the NSE Nifty50 also ended lower by 121.10 points at 23,361.05.
International markets took a knock, all markets except the dollar of course which jumped again.
The Bloomberg Dollar Index jumped 0.9%, trading near a two-year high, after President Donald Trump announced those tariffs.
The Canadian dollar fell to its lowest since 2003 and the euro weakened, Bloomberg said, quoting Goldman Sachs Group Inc. strategists saying there is a risk of a 5% slump in US stocks because of the hit to corporate earnings.
Wall Street
Wall Street got hit by Trump’s tariff calls because the market sees it as a precursor to a full-blown trade war which is imminent which in turn would disrupt global supply chains, drive up inflation again and slow the US economy.
Futures tied to the Dow Jones Industrial Average fell 611 points, or 1.4%. S&P 500 futures dropped 1.6%, while Nasdaq-100 futures lost 1.8%. Futures on the Russell 2000, the small-cap benchmark, lost 2.2%, reported CNBC overnight.
Earlier, the leading European equity markets sank with Germany’s Dax benchmark off by nearly 2%. Even Bitcoin fell to around the $ 95,000 level from above $102,000 before the weekend. Ether lost 12%.
The ICE U.S. Dollar Index, a measure of the U.S. dollar versus several currencies, leaped 1%.
MeanCanada has responded with retaliatory tariffs of its own, while Mexico said it would explore levies on U.S. imports. The Chinese government, meanwhile, said it would file a lawsuit with the World Trade Organization.
Of all three, Canada seems determined to respond and is likely to do so first, going by statements made right now.
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India's factory activity started 2025 on a positive note, growing at the quickest pace in six months in January largely thanks to steady demand and strong output, the HSBC final India Manufacturing Purchasing Managers' Index (INPMI=ECI) compiled by S&P Global said, rising to 57.7 last month from December's 12-month low of 56.4.
The index has been above the 50-mark separating expansion from contraction since July 2021.
Domestic and export demand were both strong, supporting new orders growth, HSBC said..
Rupee
Speaking of Dollar Index, The Indian rupee fell 67 paise to a record low on Monday after U.S. President Donald Trump slapped tariffs on imports from the country's three biggest trade partners, increasing nervousness about the impact of a global trade war.
The rupee declined to 87.28 per U.S. dollar before closing at 87.1850, down by nearly 0.7%, its biggest single-day percentage loss since Jan 13, Reuters said, adding Asian currencies also slumped after the dollar rallied on Trump's sweeping tariffs that impose a 25% levy on Mexican and Canadian imports into the U.S., while those from China will attract a 10% charge.
The tariffs kick in on Tuesday so there is a day of bargaining and negotiating still possible which is presumably why Trump had left a couple of days between signing of the orders and the tariffs kicking in.
Going beyond Rs 87 is a new low and has some significance even if expected somewhat.
I reached out to Kunal Sodhani, FX expert and vice president at Shinhan Bank and asked him whether the rupee range was in control.
INTERVIEW TRANSCRIPT
Kunal Sodhani: So if you ask me about the levels first, I don't think there was a pattern of a channel between support and resistance after the new RBI governor has come in. And also if you talk about the statements which have come from the finance secretary of India, they have been very clear that rupee will find its own demand and supply. Yes, there may be some interventions in interims to curtail some kind of volatility which is excessive in nature.
But I don't think there is a predetermined path of a narrow range which used to be earlier and that is why we have been seeing levels moving higher. Though we have seen FX reserves moving left towards almost 13-month low, but I think they understand that the intervention also comes at a cost. You know, it's about the import cover as well as it comes with a cost.
So as you rightly asked me, I don't see a predetermined pattern and if you ask me the base, I think 86-20, 86-40 levels is acting as a good base for now and a slow steady gradual depreciation 3-3.5% can be seen for the year.
Govindraj Ethiraj: You know, after Trump announced tariffs on Mexico, Canada and China, we saw both the Mexican peso and the offshore Chinese yuan and the Canadian dollar falling substantially and of course India has fallen too. So the dollar is now back to its two-year high. What is your sense of the strength of the dollar itself?
As in how strong can it get and what is the, let's say the basis that supports it or what's driving it to these levels or these newer levels?
Kunal Sodhani: First of all, Trump had three important focusses. One obviously was tariff which he had told at February 1st will be the date where he will announce firmly in terms of numbers. So he definitely announced as you focused on that 25% on Mexico and Canada and 10% to start with China.
Now, Donald Trump is very peculiar even when he had a term in 2016. He was clear that whichever country's US is running trade deficit wealth, those countries which will incur tariffs because that's something which disturbs him and as we put in numbers also, US runs 30.2% deficit with China, 19% with Mexico and 14% with Canada and even 3.2% with India. So now these are the three, four countries where the important focus will be apart from even the Eurozone.
So they started with it. These tariffs will be also important because the statement which also came from the US Treasury Secretary which states that they will be imposing tariffs 2.5% and increasing it up to 20% but the major focus was they will also reduce taxation. Now if they will reduce taxes which was even done in 2016, then the gap has to be filled from somewhere and that somewhere is nothing but tariffs.
That's what I understand. So that's the first move which will obviously push the dollar index higher because once the tariffs are imposed, it creates more of inflationary environment into the market and once there is inflationary environment into the market, it's more dollar bullish across the majors also and across Asian currencies also. So dollar index from here as if I put into numbers, then I think the space immediately is towards 112.40 followed by 114.70 which has been the near highs which was 114.70 roughly and if I talk about a base where the bottom can be and somewhere it's finding important support is 107.20 to 107.60 band. It has been bouncing from those levels time and again. So I think that acts as a strong base and I support dollar bullishness will be there but yes it will not be one-sided because retaliatory tariff actions will also be taken as they have been already announced by Canada, Mexico as well as China has gone for a lawsuit with the WTO. So some kind of retaliation will happen and considering Trump's nature, it's very uncertain.
You never know he pulls back something for a month and then again he comes back. So volatility will be there. Slow steady depreciation of rupee is expected but I don't see any wild move towards 90 odd.
That's not what I mean.
Govindraj Ethiraj: Right and if we were to look at purely domestically including let's say India's own need for dollars to buy oil if prices go up. I mean we're buying oil all the time and it's not clear right now. It looks like prices could go up but they may not.
So what's your sense on the demand side?
Kunal Sodhani: So first demand for dollar is definitely there because of couple of reasons. One in the system also we are running with the liquidity deficit. So if I talk about a liquidity number is around 3.1 lakh crores of deficit. RBI did announce some measures in terms of OMO, buy sell swaps and VRR which did infuse or will infuse liquidity to the tune of 1.5 lakh crores but even the dollar liquidity is thin. I would not say you know the demand for dollar is raising and even if you want to buy dollar for your leisure trip you know the rate you will get now is around 88 if you want to buy physical which also shows that there is demand which is firm. At the same time there is supply constraint for the dollar plus if I talk about importers also you know I have been observing when I speak to my own clients there has been some pressure mentally that even the forwards have started rising once again.
The funnier forward had dropped to 2.1 percent and now again it is moving towards 2.3 percent. So this demand will definitely persist to remain and in terms yes there can be some buy sell swaps by RBI in order to curb some kind of volatility or excessive sharp depreciation but I think as I said demand from importers as well as from the retail side or corporates will always be on a higher side considering lot of uncertainties both on tariffs as well as on the geopolitical front. Secondly answering your question on the crude oil.
So crude oil definitely is in a good narrow range for India. So India is at a sweet spot when we talk about Brent crude prices. We did see a sharp rally towards 81-82 dollars in between but again we were lucky enough that that cooled off towards 75 to 76 dollars per barrel.
So I think the broader range still remains with 71-72 dollars acting as support while 82 dollars per barrel acting as a resistance. There's nothing firm on the geopolitical front. It's more the focus has completely turned off towards America first and the Trump trade.
So I think from the oil perspective I don't think any pressure at this point in time even going forward.
Govindraj Ethiraj: Kunal it's been a pleasure speaking with you. Thank you so much for joining me.
Kunal Sodhani: My pleasure. Thank you so much.
Trade Wars
President Donald Trump said the tariffs he has imposed on Mexico, Canada and China may cause "short term" pain for Americans.
Meanwhile, the EU is also gearing for tariffs on its exports into the US.
Trump said he would speak on Monday with the leaders of Canada and Mexico, which have both announced retaliatory tariffs of their own, but downplayed expectations that they would change his mind.
"I don't expect anything dramatic," Trump told reporters as he returned to Washington from his Mar-a-Lago estate in Florida. "They owe us a lot of money, and I'm sure they're going to pay."
He also said tariffs on the European Union would "definitely happen", but did not say when.
"They don't take our cars, they don't take our farm products. They take almost nothing and we take everything from them," he told reporters on Sunday.
EU leaders were expected to discuss tariffs in Brussels on Monday in the wake of Trump's comments.
Chancellor Olaf Scholz of Germany, the EU's largest economy which is very reliant on exports, said the bloc could respond if necessary with its own tariffs against the U.S. but stressed that it was better for the two to find agreement on trade.
New Oil Routes
And the India Energy Week segment
US oil refiners set to be hit by tariffs on Canadian oil will look to Latin America and the Middle East to replace suddenly more expensive Canadian and Mexican crudes following President Donald Trump’s tariff salvo, Bloomberg reported.
American processors are likely to seek alternative grades of the types of heavier oil produced by its neighbors from Brazil and Guyana, given their relative proximity, the traders said.
And interestingly, they could even source crude from as far away as Iraq, although it only produces a limited amount of so-called destination-free cargoes that can be exported anywhere, they said.
Trump’s moves have hit around 4.5 million barrels a day of oil imports from his neighbors, the bulk of which comes from Canada and will be slapped with a 10% duty while Mexican crude will be hit with a 25% duty.
Venezuelan crude would be a suitable replacement, but it’s unlikely Washington will relax curbs on flows from the South American nation.
All of this could obviously lead to re-routing of supply chains and thus meaning tankers will have to move for longer periods in different directions, for example some of the Mexican and Canadian crude could go towards Asia, though it would not be easy to switch suddenly, according to experts.
Canadian producers will be forced to “lower Western Canadian Select prices to offset the 10% tariff,” JPMorgan Chase & Co. analysts said in a note reported by Bloomberg adding Mexico “can redirect exports to Europe and Asia, while the US can replace Mexican crude with longer-transit-time alternatives,” they said.
And the impact on the US
Well, it's more in the west or Midwest which depend on Canadian oil who will face higher feedstock costs due to the tariffs.
This would mean an extra $3 to $4 a barrel borne by Canadian producers and $2 to $3 by Midwestern consumers, Goldman Sachs said, and this will obviously affect the price of refined oil products elsewhere in the US, they said.
Importantly, this could help Asian and European refiners, who may benefit from stronger markets for gasoline and diesel.
Chinese and other Asian processors that have been struggling with sinking margins following Washington’s Jan. 10 sanctions on Russian oil may benefit, Bloomberg reported.
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Income Tax
The tax measures announced in Budget 2025 are expected to push up bank deposits by Rs 42,000-45,000 crore, strengthening banks' lending capacity, financial services secretary M Nagaraju said on February 3, in a report quoted by Moneycontrol.
A rise in deposits is expected on the back of higher savings among senior citizens, non-senior citizens, and taxpayers benefiting from the enhanced tax exemption limit of Rs 12 lakh, he said.
"There is Rs 1 lakh crore revenue foregone. Out of that, we expect at least Rs 20,000 crore will come back to the banks. Everybody will not spend this additional income, some will be kept in fixed deposits. Altogether, we expect anywhere between Rs 42,000 crore and Rs 45,000 crore in additional bank deposits," Nagaraju said.
Which also would mean that not all that money saved would go into buying consumer products as some, and I only do think some, people were hoping.
The good news of course is that the increase in deposits is expected to boost liquidity in the banking system, allowing banks to extend more loans to businesses and individuals.
Meanwhile, the Central Board of Direct Taxes (CBDT) chairman Ravi Agrawal has said the Income Tax department has transitioned from an adversarial entity to one that adopts a more participative approach.
Which is of course nice to hear given that it is an open acknowledgement that the Income Tax was adversarial at one point of time.
Speaking at an industry meeting, the chairman said the department now operates under the guiding principle of "trust first".
Agrawal further said the tax administration is committed to "fostering stability and simplifying business operations" in India.
He also noted that governance in direct taxation has undergone a transformation, with policies increasingly focused on ensuring transparency and enhancing the ease of doing business.
He quoted several examples and announcements in the Union Budget speech presented on Saturday to bolster his case.
While we have to wait and see whether the IT Deptt is transitioning to its new avatar, meanwhile, there is a fair amount of fine print still waiting to be analysed.
For example, transfer pricing is a bane of every multi national or Indian company operating across borders.
Transfer pricing has also seen a huge amount of litigation, crippling companies and also making it difficult for them to plan and invest ahead.
The latest Budget appears to have taken some steps to ease matters.
I reached out to Ajay Rotti, Founder and CEO of Taxcompaas Advisors a tax and regulatory services firm based in Bangalore and began by asking him to talk about the changes to transfer pricing law and also to start with telling us what transfer pricing was about ?
INTERVIEW TRANSCRIPT
Ajay Rotti: Transfer price is essentially the price at which goods or services are literally transferred between two related parties. So, you know, when two related parties are dealing with each other, you can set the price in such a way that you can move profits around. You can move profits from one country to another by paying lower or by paying higher and therefore moving profits etc.
So, transfer pricing is a mechanism where those prices are tested and any transaction between two related parties has to be like as if those two are not related and the price at which you would have bought from a third party. That's in simple terms what transfer pricing regulation is supposed to do. Now, how do you set the price like it would be with a third party?
You find a set of comparable companies, what is their margin, what's the price at which they operate and therefore used to be. So, India continues to have a peculiar problem where our litigation is centred around those choosing the comparables. Therefore, you know, companies would have litigation for the last five, seven years, literally for every year on the same issue on transfer pricing with margins being adjusted each year and that is at least something that the government has recognised and seen the need to address.
That's what has changed in the budget and let me tell you what has changed. And the FM announced this in the speech and there's some bit of amendment which has already happened and some of it will come out by way of notification of rules as we move along. So, what essentially they have proposed is that if you're going through a transfer pricing audit in one year, which means the income tax department is examining whether you've set the price right, you can opt and make a declaration to tell the income tax department that whatever you decide in this year for the same transaction and similar transactions, I will apply the findings for subsequent two years, which means you're going through audit in 22-23 for example. Of course, you can't apply it for this year but I'm taking it as an example and you tell them whatever are your findings for 22-23 financial year, you apply it for 23-24 and 24-25. So, what happens is what would normally have resulted in three orders, three years litigation, today comes and becomes one order and with that one order, you are set for three years.
I think this is a big thing. This is going to change. There are some, of course, some doubts in the way it is drafted etc.
but going by the intent, I'm sure they're going to address that and the rules are to be notified as to which form you have to use when you have to make these declarations etc. From a multinational perspective coming into India or even Indian companies that are having cross-border transactions, one of the biggest issues has been litigation and certainty. So, this is going to make a huge difference accordingly and also, of course, it impacts the GCCs etc.
Interestingly, in the economic survey, there was a paragraph on GCCs and there was a comment to say that there are certain tax rules which are changed and bringing certainty in terms of very specifically mentioned. So, I think this is part of a larger thing. One of the really good moves in this budget from a corporate international tax perspective.
Govindraj Ethiraj: Right and GCCs or global capability centres is something that I mean everyone is now referring to, focussing on and also looking at how to make things easier. Now, you were also saying that basically the certainty in the transfer pricing regime or relative certainty is also now extendable in some ways or visible in other parts of the way the budget document has been drafted.
Ajay Rotti: Yes, see over the last few years in particular, we've not had these minor tinkerings of changing something number of years that you can do something or the rate of TDS and then bringing it back or rolling it etc. Earlier, you know, finance bills used to run into many pages, hundreds of clauses, small changes in so many sections, sometimes changes to sort of negate rulings, negate supreme court decisions which are taxpayers one etc. That has sort of reduced.
Also, there are no changes. Directionally, it's been the same. They have not had tax incentives, tax holidays, which has been done away with.
We've not got it back except for IFSC, which is the gift city related things. Interestingly, there are two tax holidays which they have extended. Normal thing going earlier, you know, you want to extend a tax holiday, you would have done it by two years, another two years again, because somebody requests.
Both the extensions this time they've given for a five-year period. Some of these are small things but really give you certainty. Instead of extending something for a two-year block twice or thrice, you have today taken a call to extend it once for all for five years.
So, some of these are there. I think more and more and I've now tracked and followed budgets for over 20 years, more and more it's becoming a non-event, which I think is a good thing. See, with GST going, half of it was gone.
You couldn't have changes on indirect tax year on year coming as a part of budget. Now, even on direct taxes, I think we've reached a place where a lot of it is stable. Some of the things needed and mostly because of requests by the industry or even because of administration, etc.
just changing. I'm not seeing any change which is sort of without a basis that's being carried out these days.
Govindraj Ethiraj: Right. So, you're saying in all the examples that you've quoted, Ajay, you're saying that basically it reflects a certain directional direction and then a directional stability, which of course, people in the world of tax and audit have been asking for and continue to ask for. So, speaking of what people are asking for, there's also a direct tax code coming, which people thought would be presented with the budget, but it's now being presented next week.
I think there appears to be some expectation versus reality situation here.
Ajay Rotti: So, in terms of timing, the FM consistently was saying that it'll come as a part of, you know, we'll be presenting it during the budget session. Some parts of media and even some people had read it to be on the budget day, etc. Leaving that aside, I think, yes, it's expected to be presented in the next week.
The FM did give some direction and some hint on what we could expect, in my view, because while talking of this, she said, you know, we've done this whole thing of criminal law and brought in DNS as a replacement for IPC. And she said the same spirit of NIA will be continued in income tax, making it simpler, changing the verdicts, language, taking out sections which are not needed, etc. So, in my personal view, I think that's where directionally we are on the new tax code.
I don't think she will revamp the structure. I don't think there'll be a huge change in the way income is computed. Rates, I don't think will be touched at all, because there are some tedious changes which have been done in the budget.
And that clearly is an indication that those are not kept for the new bill that's coming. I think new bill is more for simplifying language, taking out sections, reducing the size of the code, etc. But it'll be an interesting watch.
The other reason I believe that it may not really be a huge change is because she's not done public consultation.
Govindraj Ethiraj: Well, I thought they did public consultations, 22 subcommittees, 6,500 responses. Yeah, but by putting out a code. Okay, okay.
A draft in the public domain and so on. Yeah, okay.
Ajay Rotti: There may not be too many radically changing the entire tax structure and things like that. But I think to be more of language simplification, which is good, which is needed. A lot of our litigation is because of some of the sections are worded.
If that is going to get cleaned up, I think it's a good thing.
Govindraj Ethiraj: I saw that you've been commenting on tax exemptions versus deductions versus rebate in the context of the 12 lakh or tax below 12 lakh, which you don't have to pay anymore. So tell us about what is the confusion that exists and why is that?
Ajay Rotti: Yeah, so I'll tell you why the confusion is there only for one reason. While the FM announced that there's no tax for people having income below 12 lakh rupees, when she presented the new slabs, it said 0 to 4, nil, 4 to 8 lakhs, 10%, and 8 lakhs to 12 lakhs, 15% and so on. So the question was, if up to 12 lakhs, there's no income tax, why is there a slab starting, you know, 0 to 4 and 4 to 8 and 8 to 12?
Does that really mean there is tax? But what does this whole no tax below 12 mean? And I'll tell you why it's structured that way, is the no tax up to 12 lakhs doesn't come because of the slabs.
One way to do it was to say 0 to 12 is nil, and 12 onwards, you start paying whatever taxes you do. When you do that, what happens is anybody earning less than 12 lakh rupees is completely out of tax. He or she need not even file a return of income because you're below 12, you don't need to file.
So the way they've done this, and this is not something that they've done this year, this is how the earlier 7 lakh limit of no tax was also there. So there is a rebate given, rebate is a reduction from your tax liability. You compute your tax liability and you reduce the relief that is given as a rebate.
So they have said 60,000 rupees or your actual income tax, whichever is lower, you get as a rebate. So at 12 lakh rupees, your tax liability is 60,000. You compute 60,000 and you say I have a relief which I'm eligible for 60,000, which is an unconditional relief.
You don't need to do anything, you don't need to invest anywhere, nothing. You just straight get it in your return of income. Therefore, your tax payable becomes zero.
What this does is it protects taxpayer base. So all the people who are filing return of income will continue to file returns of income. And then if there were whatever, six, eight crores, seven crores, whatever that number is, for filing returns will suddenly not become one or two crores today.
Therefore, one way it is good because you are giving relief, but you're not taking anybody out of the entire tax compliance in the net. Then the question was, is there a, you know, why would somebody have to file return if there's no tax liability? But as we moved over the last few years, I don't think you need anybody to file your simple income tax return.
It just happens online. I think in balance, it is good. The last and the other reason why they have done this is for people who are above the 12 lakh limit.
So assume somebody is getting 50 lakh rupees, then that person doesn't get the benefit of zero to 12 lakh rupees. There is tax payable. Therefore, you are giving this relief only to people who are below 12 lakhs.
People who are earning more will pay tax, but at a different slab rate, which gives them the benefit. So two reasons why it's structured as a relief, does not change the liability in any manner. I think people were expecting to see that the slab itself will have become zero to 12 is nil.
And that's why this confusion has arisen.
Govindraj Ethiraj: Ajay, thank you so much for taking us through both the corporate and the individual side of taxes and the fine print. Thank you so much.
Ajay Rotti: Thank you.
