It was waiting to happen. Even then, US president Donald Trump’s first missive in a global trade war has sent India’s stock markets plunging.
The Sensex spiralled down over 430 points, about 1.3%, in early trade on March.23, mirroring the panic in other global markets. Its Asian peers nosedived, led by the index in Shanghai which tumbled over 3%. In Japan, Nikkei fell by up to 4.6%. The Yen strengthened to a two-year high and that could be damning for the export-dependent Japanese economy. Meanwhile, following a 700-point fall in the Dow Jones index on March 22, the US stock futures signalled a further 2.5% fall in the S&P 500, the sharpest drop in six weeks.
The trigger was Trump’s decision to impose 25% duties on Chinese imports, including machinery and IT exports, worth at least a cumulative $50 billion. Beijing has threatened retaliation. The expectation is that the Chinese government would now impose reciprocal tariffs on $3 billion of US imports, including pork, aluminium, and steel.
While the sell-off in India was sector-agnostic, the biggest hit was taken by the metal stocks and those of public sector banks, diving over 3% each. There’s a reason for this: Steel and aluminium are central to the trade war between the world’s two biggest economies.
With the US imposing added duties on imported steel, the fear is China will dump its cheap steel in other markets, including India, bringing local prices down. This will add pressure on many Indian firms that are already drowning in debt and looking for bidders.
The additional stress on the steel business will also be bad news for banks in India, which have lent billions to some of these firms in recent years, and are now dealing with defaults. For the lenders, particularly the state-owned ones, this is just the latest in a string of bad news such as soured loans worth nearly $150 billion and bank frauds adding up to over $2.5 billion at last count.
Although Trump’s move was largely expected, the magnitude of the levies was not known. Additionally, the fear of a Chinese backlash has spooked the markets. The two biggest world economies turning protectionist is the worst news for emerging economies like India.