In a conversation with Kshitij Anand of ETMarkets, Powell noted that easing inflation and the Reserve Bank of India’s accommodative stance have made Indian government bonds an attractive source of income, offering higher yields relative to many global counterparts.
He also emphasized the strategic importance of gold as a portfolio diversifier, especially in the face of mounting geopolitical tensions and ongoing trade policy uncertainty.
Edited Excerpts –
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A) The U.S. has paused newly announced tariffs for most countries for 90 days, just hours after they took effect and unleashed volatility almost on par with the biggest market shocks of the past few decades.
President Donald Trump suspended the extra “reciprocal” tariffs on all countries except China, now facing tariffs of at least 145%. The 10% universal tariff remains.
Trade tensions with China are deepening and significant uncertainty remains. Yet the pause suggests that the U.S. administration is taking some account of financial risks and costs as well as a country’s willingness to engage, putting a check on a maximal stance during the negotiations.
This is a major development, particularly in easing the near-term risk of a financial accident. Yet we need to brace for unpredictable negotiations, and the U.S. is still likely to end up with much higher tariffs than we expected a few weeks ago.
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Second, a universal 10% tariff on most imports to generate revenue and aid domestic production.
Third, country-specific tariffs on roughly 60 nations with goods trade surpluses with the U.S., intended to provide negotiating leverage to reduce imbalances.
U.S. tariffs add to inflation, and ongoing uncertainty is raising the risk of a recession. Prolonged policy uncertainty may weigh on corporate capital spending and delay longer-term commitments.
Consumer spending could be hurt by any erosion of wealth and real incomes. The dented confidence of foreign investors in the U.S. could curb their appetite for U.S. assets
For China, we see tariffs lowering growth – and potential policy stimulus only partly offsetting that drag.
Indian goods exports to the U.S. face a tariff of 10%, with the additional 26% “reciprocal” announced on April 2 now paused for 90 days.
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That said, goods exports to the U.S. make up less than 5% of GDP, limiting India’s direct exposure relative to more trade-reliant economies — though ripple effects from a broader global trade slowdown remain a risk.
The Reserve Bank of India has shifted to an accommodative stance after cutting rates by 25 basis points to 6% earlier this month. Falling oil prices support India as a major energy importer.
Q) How should India and other emerging economies prepare for potential shifts in U.S. trade policy?
A) We stay neutral emerging market equities and think the U.S. tariff impact will differ by region. With the start of a new negotiation phase on tariffs, we think India is likely to adopt a conciliatory approach.
Ahead of the April 2 tariff announcement, India had already started reducing import tariffs on select goods to negotiate a better deal with the US.
Also, key is how long historically high U.S. policy uncertainty persists – the longer it does, the greater the potential damage to economic activity.
Q) What are the dominant global investment themes for 2025, and how are they influencing capital flows into emerging markets like India?
A) The 90-day pause on additional reciprocal tariffs suggests that the U.S. administration is taking some account of financial risks and costs as well as a country’s willingness to engage, putting a check on a maximal stance during the negotiations.
As a result, we extend our tactical horizon back to six to 12 months from three months and cautiously lean into risk. We up equity exposure, including to U.S. and Japanese stocks.
Yet we expect ongoing volatility and potentially sharp reversals. Selectivity across sectors and securities will be key, and we are wary of chasing momentum.
We see opportunities in U.S. technology and global banks, especially European, hurt by the broad-based selloff.
Long-term U.S. Treasuries have failed to offer ballast during the stock selloff against a backdrop of persistent budget deficits and sticky inflation. We favor gold as a portfolio diversifier.
Yet focusing too narrowly on short-term, cyclical macro trends risks missing the broader story. In India, our focus remains on long-term growth drivers — rapid digitization, favorable demographics, and urbanization – that bolster India’s medium- to long-term potential.
Two themes we are tracking that we believe present appealing opportunities: a fast-expanding consumer base, and the rising importance of domestic capital markets in how Indians save, invest, and spend.
Q) With the shift towards higher real rates globally, how do you see foreign institutional investors (FIIs) reallocating their portfolios in India?
A) Mega forces are reshaping India’s economy, driving structural shifts that present both opportunities and challenges. A young and expanding workforce, rapid digitization, and resilience in a fragmented geopolitical landscape bolster India’s long-term growth prospect.
We think market dislocations can create opportunities for security selection. Over the medium- to long- term, we see opportunities from intertwining mega forces such as digitization and demographics expanding the base of consumers spending beyond essentials.
We see an appealing risk-reward in large-cap Indian equities for global investors with a long-term view.
Q) How is the evolving geopolitical landscape affecting investor sentiment toward India compared to other emerging markets?
A) The sharp escalation in global trade tensions and extreme trade policy uncertainty has triggered a broad risk asset selloff.
The U.S. is still likely to end up with much higher tariffs than we expected a few weeks ago. We estimate the average effective tariff rate is now around 20%, even with the pause.
We cautiously lean into risk and shift our tactical horizon back to six to 12 months from three months. We up equity exposure, including to U.S. and Japanese stocks.
Yet we expect ongoing volatility and potentially sharp reversals. Selectivity across sectors and securities will be key, and we are wary of chasing momentum.
India is not immune to global market volatility. Broader risk-off moves, tighter financial conditions or external shocks can weigh on performance in the short run — but we believe its structural growth story remains intact.
Q) Indian equities have performed well relative to many global peers. Do you see this trend continuing in 2025, or are there risks investors should watch out for?
A) Indian equities have traded in line with broader emerging markets this year so far. A valuation reset in mid and small-cap shares has been offset by the benefits of declining energy prices, and some potential for India to capitalize on the rewiring of the global trading ecosystem.
Indian equities have not been spared from the volatility sparked by global trade policy uncertainty. Domestically, sluggish sentiment driven by moderating economic growth has also weighed on markets in recent months.
We use the equity risk premium (ERP) — which reflects earnings growth and interest rate expectations — as our preferred valuation gauge. Our estimate for India, around 4.9, is roughly in line with its long-term average.
Valuations on traditional metrics such as forward price-to-earnings multiples have retraced closer to historical averages. MSCI trades at about 20 times forward earnings compared to an average about 18 times over the past two decades – and below the all-time high of 25 times in October 2024, according LSEG data.
A cyclical slowdown domestically and globally, in part due to trade tensions, would weigh on near-term corporate earnings.
Focusing too narrowly on a cyclical slowdown risks missing a broader shift. A growing, digitally enabled middle class is reshaping both consumption and capital allocation — and we believe that opens up a range of investment opportunities – for example, in financial services, consumer staples and retail, and digital platforms & e-commerce.
Q) How do you view India’s fixed-income market in the context of global interest rate trends and domestic monetary policy?
A) Signs of moderating growth and easing inflation have prompted the Reserve Bank of India to act. The central bank lowered the repo rate by 25 basis points to 6.0% and changed stance from neutral to accommodative in its April meeting, while lowering its inflation and growth forecasts.
We watch for India's fiscal and monetary policy measures to mitigate the impact of tariffs and sustain economic growth.
We expect further rate cuts over the next five years, set to steepen the currently flat yield curve as short-term rates decline.
Unlike markets such as the U.S., where we see long-duration bonds facing repricing risks from higher-for-longer interest rates, we believe Indian government bonds are less exposed to such risks, with yields at the long end of the curve more appropriately priced in our view.
We see India’s government bonds as a compelling source of income, offering higher yields than major global markets. The upcoming inclusion of Indian government bonds in the JPMorgan GBI-EM index is poised to boost foreign demand for India debt, in our view, providing further support for this asset class and reinforcing its role in diversified portfolios.
Q) What sectors or asset classes appear most vulnerable to global uncertainties in 2025, and where do you see the most opportunities?
A) Trade tensions triggered a risk asset selloff. The U.S. has paused newly announced tariffs for most countries for 90 days. This is a major development.
We cautiously lean into risk and shift our tactical horizon back to six to 12 months from three months. We up equity exposure, including to U.S. and Japanese stocks. Yet we expect ongoing volatility and potentially sharp reversals.
Selectivity across sectors and securities will be key, and we are wary of chasing momentum. We see opportunities in U.S. technology and global banks, especially European, hurt by the broad-based selloff.
Long-term U.S. Treasuries have failed to offer ballast during the stock selloff against a backdrop of persistent budget deficits and sticky inflation. We favor gold as a portfolio diversifier.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
