Markets may wilt under US reciprocal tariff weight

Trump’s comments on the weekend dragged South Korea’s Kospi and Japan’s Nikkei down by 3-4% on Monday, while Germany’s Dax and France’s CAC traded 1% lower at the time of writing.

Indian stock markets are likely to feel the pain on Tuesday, said analysts. Options data as of Friday indicates a range of close to 500 points from Friday’s closing level of 23,519. The key support priced in by option traders was 23,263, with the resistance at 23,737.

A decisive break below 23,263 could result in the markets testing the 23.6% retracement level of 22,982, which squares with the weekly options’ significant outstanding position build-up at the 23,000 put level.

Retracement refers to the market making up some of the losses by bouncing off the lows. As it rises, it encounters resistance at crucial levels.

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Nifty has fallen from a record high of 26,277.35 on 27 September to a low of 21,964.6 on 4 March, a fall of 4,313 points. From there through Friday’s close of 23519.35, it has clawed back 1555 points.

“Volatility could increase if markets fall below 23,200 in the short term as a fallout from reciprocal tariffs,” said Sahaj Agrawal, head of derivatives research (private client group) at Kotak Securities.

US investment bank Goldman Sachs on Sunday raised the probability of a US recession to 35% from 20% earlier over the next 12 months because of tariff-induced economic pain.

Indian markets posted their first positive monthly close in March after five months of declines on overseas investors’ outflows. Foreign portfolio investors (FPIs) sold Indian equities in favour of US bonds, whose yields spiked on fears that a trade war could unleash inflation and raise the cost of funds for businesses and households.

The 10-year benchmark US bond yield rose from 3.7% around mid-September to 4.2% by February-end. Over the same period, Nifty 50 tanked 14% to 22,124.7 as FPIs offloaded ₹ ₹2.79 trillion on the secondary market.

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DIIs and FPIs

Domestic institutional investors have absorbed the FPI selling, having net purchased cash shares worth ₹3.75 trillion from October to March against ₹2.85 trillion net sales by FPIs. However, the market fell as DIIs bid for shares at lower levels than the price sought by FPIs.

March bucked the trend as FPIs turned net buyers in the last few trading sessions, with Nifty gaining 6% to Friday’s closing of 23,519.35. To be sure, FPIs remained net sellers for the whole month, but the selloff narrowed to ₹6,028 crore.

However, the FPI selling could intensify again if the global tariff war escalates after Tuesday.

The dollar index has fallen from the high of 110.18 earlier this year to 104 as US businesses rushed to import goods ahead of the reciprocal tariffs kicking in. This resulted in dollar supply increasing with holders of other major currencies, resulting in a decline in the relative value of the greenback, which is used in 70% of global trade invoicing. However, as goods and services become costlier in the US, the Federal Reserve might be unable to cut interest rates, rendering US exports uncompetitive. A stronger dollar and higher US bond yields could exacerbate FPI outflows from emerging markets like India.

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“Our markets are likely to face the music again after four weeks of a bounce,” said Rajesh Palviya, derivatives head of research at Axis Securities.

Palviya said if the ramifications of the reciprocal tariffs worsened, the markets could retest the 4 March low of 21,964.60, the lowest closing since the election result level of 21884.50 on 4 June last year.

A few market veterans see a period of consolidation for the markets over the next two to three quarters.

“The markets could consolidate until earnings growth improves relatively from that in FY25,” said Gaurav Dua, head of capital market strategy at Mirae Asset Sharekhan.