India vs Asian markets: Will lower tariffs than Asian peers help Indian stock market attract FII flows?

India’s relatively lower tariff rate, particularly in comparison to other Asian nations such as China, Vietnam, and Thailand, is being seen as advantageous by experts, as they believe this would give the domestic stock market an upper hand in drawing Foreign Institutional Investors (FIIs).

With a reciprocal tariff of 26% on India compared to 34% on China, India emerges as a more cost-effective option for global investors, say analysts.

Reduced tariffs lower the expenses associated with conducting business, thereby enhancing the appeal of Indian markets over those in high-tariff countries. This competitive advantage motivates FIIs to allocate larger sums of capital, anticipating greater returns in a trade environment with fewer barriers, according to Akhil Puri, Partner at Financial Advisory, Forvis Mazars.

With optimism surrounding this situation, the question arises whether there might be a trend reversal from 'Sell India, Buy China.'

Akhil Puri further pointed out that in the near term, decreased tariffs could lead to an increase in FII inflows, enhancing market sentiment and liquidity. A favourable tariff framework indicates a pro-business environment, resulting in an immediate influx of foreign capital and heightened investor confidence, he said.

“In the medium to long term, the continuation of these inflows will rely on stable trade policies and regulations that are friendly to investors. If India upholds a consistent policy environment, reduced tariffs could provide a steady and reliable flow of FII investments,” Puri opined.

Following a harsh 15-week period of sell-offs—the longest run of foreign capital withdrawals—Indian capital markets experienced a flicker of optimism in late March as international investors shifted to being net buyers. This cautious turnaround came after total outflows amounted to an incredible ₹1.45 trillion, sparking hopes that the worst might be behind. Nevertheless, analysts emphasise that numerous factors should be examined in light of the recovery or a potentially fleeting pause.

What do FIIs focus on?

Prashanth Tapse, Research Analyst, Senior Vice President of Research at Mehta Equities, explained that comparatively having lower tariffs can create interest in a few sectors like pharma and textile in India, but many more factors also influence investment decisions.

In today’s environment, FII will focus more on valuations, earnings growth, economic recovery and market dynamics, which would have more weightage in creating interest for FIIs to return to India, Tapse said. Lower tariff benefits can be only a sentimental positive impact on sectors, while earnings growth would be the most noticeable factor for future growth, according to the experts.

Factors working to India's advantage

Declining oil prices reduce India's import expenses, alleviate inflationary pressures, and enhance the current account balance, which provides the RBI with greater flexibility to focus on economic growth. At the same time, a declining dollar index typically supports or stabilises the rupee, promoting capital inflows and mitigating imported inflation.

VK Vijayakumar, Chief Investment Strategist, Geojit Investments Ltd explained that Trump’s tariffs will have a negative impact on global trade and global growth. The risk-off that we are witnessing now in global markets is a reflection of this concern.

“However, from the Indian perspective, there are some positives. Since the Indian economy is largely domestic consumption driven the impact on the India economy will be lower than in most large economies. This can lead to capital inflows into India from FIIs. Weakening dollar has always been positive for emerging markets. The ongoing trend of weakening dollar can facilitate inflows into India. Among emerging markets India has the best macros and growth prospects even in these highly uncertain times,” Vijaykumar said.

According to a report from Reuters, the US dollar has seen significant depreciation, with the euro reaching a six-month peak against the dollar on Thursday and rising 1.74% to $1.1037. Meanwhile, the dollar decreased by 1.95% in relation to the Japanese yen, settling at 146.445 yen, and dropped 2.35% against the Swiss franc, at 0.8608 franc.

Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decision.