What does easing inflation, India-US trade talks mean for stock market investors?

The Indian government is one of the six out of 180 countries that have offered concessions on U.S. imports, a move that American President Donald Trump would likely view positively. Investors are closely monitoring the bilateral trade talks between the U.S. and the EU, China, and Japan; outcomes from these discussions are expected to significantly influence the markets.

Every major nation now strives to engage in bilateral trade talks with the U.S. and each other, suggesting that future global trade agreements may carry less weight. In contrast, bilateral contracts are likely to gain more value.

The relatively more straightforward market environment after the pandemic, characterised by low uncertainty, has ended, and markets are now readjusting to global changes. Market volatility is at its highest level since the pandemic, making forecasts very uncertain.

Earnings slowdown ahead

Corporate India and many businesses worldwide are slowing down their expansion plans for new offices and factories. This deceleration is contributing to slower employment growth, leaving consumers feeling insecure. In response, the Indian government has increased its infrastructure spending on roads, bridges, and dams to support growth and improve its physical infrastructure. Such infrastructure investment is crucial for attracting foreign investment to India and alleviating bottlenecks in development spending.

U.S. corporate earnings for the S&P 500 are projected to slow from 14% to 11%. Meanwhile, India's earnings growth is expected to decelerate to 8-10%, down from earlier estimates of 15% year-over-year. However, growth rates could quickly increase if the EU and/or China reach tariff agreements in the next three months. The U.S. inflation rate for March is at 2.4%, which is lower than expected and viewed positively.

Nonetheless, Jerome Powell, the Fed Chair, has indicated that tariff uncertainty could lead to an unpredictable inflation outlook. As trade negotiations commence, the European Union is anticipated to cut interest rates soon to mitigate economic pressures. The U.S. may also consider following suit; however, the Fed is constrained by data, which might not adapt swiftly to the current situation.

US-India bilateral agreement in focus

Indian government sources indicate a 90-day pause on tariffs, with a 10% tariff still in place during this period. Piyush Goel, India's Minister of Commerce, is heading a team working with the U.S. government to finalise a bilateral agreement. A series of meetings is expected to begin in the coming month.

Domestically, the Reserve Bank of India's (RBI) interest rate cuts and growth stance are favourable for equity markets. Lower interest rates reduce corporate working capital expenses, support government infrastructure spending, and decrease borrowing costs for consumer home loans. As interest rates and oil prices fall, India's import bill is expected to decline, which will help lower inflation. This development will also stabilise the Indian Rupee against the U.S. Dollar.

Economists forecast slower growth alongside higher inflation; however, the uncertain timelines for successful negotiations could lead to widely varying predictions. Lower Trump tariffs and reduced interest rates create favourable conditions for India's economic growth. We look forward to productive resolutions that will act as catalysts for India's financial advancement and promising market returns. Hope is indeed a powerful thing.

(The author is Chief Investment Officer—Equities, LGT Wealth)

Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.