Tariffs, Trump & Trade | Advantage India

After putting a lot of importance on 'Trump Action', market seems to be ebbing it off

Apr 20, 2025

So, tariffs have been all over the news.

And by now all these announcements are getting more exhausting day by day. So what exactly is going on? And how does it affect our life?

Well, 2 things -

1 - The American economy is so big that in case it goes into recession, everyone will catch cold

2 - World Wars in the past have started with Trade wars - what we see right now is an all out Trade war

Again, this is not a post of gloom and doom but if you want to really assess what can go wrong, these are the 2 condensed outcomes from a worst case scenario.

Now, time to dive deep.

Clearly, there are multiple ways to interpret this image. Last night I was invited to give a presentation on this very same topic to the senior leadership team of India’s biggest auto company - there were a multitude of answers.

So, is Trump throwing darts in the dark and his team is busy justifying the decisions?

That is probably NOT the case.

Whether we like it or not US has a debt problem. Every time they feel the debt servicing angle for the country is going a little out of hand, print more money! i.e. issue more debt.

This has been the approach for the longest time and clearly this party cannot go on forever - we have heard talks of de-dollarisation for the longest time but the reality is if 65% of the world trade happens in USD, it is a little difficult to have that changed overnight.

How bad is the US Debt issue and what are the numbers?

In such a scenario, you would want your interest rate to go down so that the burden on your budget is lower. Just to give you context, India’s interest expense is ~25% of total Budget Expenditure. But more on that later, first let’s try and assess what is happening here.

While we may be obsessed with looking at what is happening to Dow Jones, Sensex, Nasdaq, Gold, Silver and Copper, the global world markets actually have 3 more bigger markets.

Yes a market 2x, 11x and 15x the size of what happens in trading volumes in Equities globally.

ADTV stands for Average Daily Trading Value - For equities it is almost 500 bn a day, Bonds are roughly 2x, Interest Rate Derivatives are about 11x and Currencies - the daddy of all markets is 15x - probably the biggest in the world in terms of the average value traded on a daily basis.

So, what is the bond market telling us?

Well, from a dummy’s guide, Interest Rate and Inflation generally go hand in hand. If things are getting expensive, you would want the money supply to tighten so you increase interest rates. When things are getting cheaper, you would want more people to buy things, you reduce interest rates and increase money supply. This is rate decided by the Central Bank (In India, it’s Repo, in USA it is Federal Funds Rate, in China it is rate decided by PBOC) and inflation is a marker of how prices of a basket of essential commodities is moving.

(Again, we will not be debating here about how this basket does not include iphone or my aspirational products etc. that is a discussion for another day.)

As a result of how interest rates and inflation move, the bond market tells us something.

What is the bond market telling us?

First, again a small dummy guide interjection.

If you are getting a bond that makes 5% for 100 rupees, you get it at a 5% yield. Now let’s say for some reason the bond price goes to 90, you still make 5% (on 100 i.e. 5) so your yield now becomes 5/90 which is roughly 5.55%

Why would something that is trading at 100 become 90? If sellers > buyers

Again, if tomorrow the Government of India bonds suddenly become more attractive - let’s say instead of 5% the yield becomes 6% - would you not rush to buy it?

Yes. (It was not a trick question)

So, let’s see what is happening everywhere.

The latest inflation print for India is at about 3.1% and our repo is at about 6%. Bond yields are holding at about 6.1-6.2%. We might see further rate cuts coming in if the inflation remains steady or falls further - unless the bond yields move in a different direction.

Now - let’s look at USA.

Inflation seems to be in control, bond yields have gone up and interest rates are high. To an extent that as early as 3 days ago, the President tweeted this.

Now, if we go back to the first image, that was the grand plan. Put massive tariffs, make the stock market crash - force yields to come down and then make the fed cut interest rates. The first two parts happened like clockwork and for the rest 2, the rest 2 has defied all logic and that points to some broader second order consequences.

The world seems to be losing confidence in the USA. You saw a stock market crash money should have ideally flown to get parked in ‘safe’ bonds. Even that did not happen.

Was there selloff across asset classes?

What did Trump have to say to this?

So the big question is - Who is selling these bonds? Is China selling these bonds?

So, why is China not budging? Well, that answer lies in Trade Balance.

Clearly, they are the biggest trading partner and if we see the major categories (which is mostly smartphones) there is a big dependency on China. And if we really see what China has been upto is a lot of things -

Innovating on the auto supply chain - BYD is a great example on cutting edge products and new tech
DeepSeek
Challenging Global world order of payments systems by building an alternative to SWIFT
Soft Power influence on the whole world through Tik Tok literally making everyone’s attention span like a goldfish

I could go on and on, but you get the drift - so now let’s stack up what is happening with India.

Exports

USD 90 bn to US – majority of is IT & Pharma (not tariffed)
US does not want generic pharma and IT – this will cannibalize high-cost drugs
Ex IT & Pharma – USD 40 bn
Even if you assume 26% - i.e. approximately USD 10 bn

Imports

USD 120 bn of Crude
Last price cut was a year back $84 / barrel
Oil is currently ~$60 – almost 30% savings USD 36 bn
Rupee is strengthening, makes other imports cheaper too

We are actually looking at a net USD 25bn +ve impact for India

And another thing to note here is very very important. US wants to bring back manufacturing that can be automated and is really large scale - think defence, battery tech, semi-conductors etc.

Also, if there is a USD 100 dollar product that lands at the US port, it may sell at USD 500 to the end consumer. The tariff is on 100 and not on 500.

So let’s say there is a tariff of 26%, end cost of the consumer does not become USD 600 but maybe USD 526-540.

Now, a guy who is not selling strategic products and doing something like footwear or generic pharma, he can easily pass on the price to the consumer which again currently point to one thing. Inflation may actually run hot and may not come down. Because till the time your additional capacity is not going live, you will have to continue importing.

I have been meaning to write this post for the last 2 weeks but every day there is a development that keeps making me push the date further. Maybe, given the pace at which announcements are coming through, I might share an update on this post soon.