Beyond the Budget: How the US Elections Will Impact the Indian Market

With the election just 100 days away, the outcome could affect currency fluctuations, US-India relations under a new US administration and have significant ramifications for domestic companies and industries with external exposure.

For example, restrictive visa policies could hurt India’s software services sector, while lower U.S. corporate taxes could lead to increased export opportunities. Moreover, rising healthcare costs could benefit Indian pharmaceutical companies.

R. Janakiraman, chief investment officer, Indian emerging markets equities, Franklin Templeton, said historical trends suggest that the outcome of the US elections tends to impact the Indian stock market. The outcome of the US elections will be assessed based on its impact on new trade policies, tariffs, trade agreements, geopolitical stability and currency movements, he said.

The race between the two US presidential candidates, Donald Trump and Kamala Harris, is extremely close. According to one US poll, Republican candidate and former US President Trump has an approval rating of 48% among Americans, while Vice President Harris has an approval rating of 47%. Another recent poll conducted by Reuters/Ipsos showed that 44% supported Harris and 42% supported Trump.

“My view is that a Trump victory would be viewed favourably by the US market as it would be good for earnings growth and corporate profitability,” said Prashant Khemka, founder of White Oak Capital Management.

“A strong performance in the US equity market will exert upward pressure on other markets globally, including India. Moreover, a tougher US stance on China could benefit India,” Khemka said.

When the US adopted an anti-China stance during the previous Trump administration, Indian boards started exploring potential opportunities and adopted a “China Plus One” strategy to encourage companies to expand their manufacturing outside the Asian powerhouse, he added.

Sandip Bansal, senior portfolio manager at ASK Investment Managers, said the new US administration’s geopolitical and international relations priorities may impact foreign institutional investment in emerging markets, including India.

He said even if the US government increases import tariffs, India could still benefit as it is likely to face relatively lower taxes on its exports compared to countries such as China, adding that India is the most promising large emerging market in the long term.

The Trump factor

However, businessman-turned-politician Trump’s penchant for US-centric policies like trade protectionism, tougher visa restrictions and curtailing foreign investment could impact Indian equities, said Jiten Doshi, co-founder and chief investment officer at Enam AMC.

But he also said President Trump’s policies have often sought to foster friendly business alliances, and that his previous term was marked by efforts to ease regional tensions, such as between the Middle East and Israel, North Korea and South Korea, and Russia and NATO.

During Trump’s last presidential term, the Nifty 50 recorded a staggering return of 112% and the Sensex 119% from around January 2017 to around December 2021. That period spanned Narendra Modi’s first two terms as India’s prime minister, who began his historic third term in power earlier this year.

Jay Kothari, global head of international business at DSP Asset Managers, said regardless of the election outcome, the US is unlikely to change its policy of diversifying manufacturing from China, which should help India capture a larger share of global trade as well as capital.

“Interestingly, within Asia, India has a low beta (exposure to global news flows and therefore recession) as its exports to GDP ratio is relatively low. This also means that India remains inward looking. On the other hand, Malaysia, Hong Kong, Singapore and Taiwan have higher betas as exports to GDP ratios are much higher in these countries,” Kothari explained.

Other important factors to watch include U.S. policies regarding tariffs, global trade, immigration, outsourcing regulations, energy prices, and currency.

Weak dollar

As the US presidential election campaign gathers steam, Trump’s preference for a weaker US dollar has attracted widespread attention.

A weaker dollar would be beneficial for emerging markets like India, boosting market sentiment, stimulating global trade and helping improve corporate earnings.

Ajay Tyagi, head of equities at UTI Asset Management, noted that during President Trump’s last term, the dollar index fell in the first few quarters but then stabilised, adding that a similar currency volatility could return if elected, given that President Trump wants a weaker dollar to make the country’s exports more competitive.

However, this is unlikely to have a significant impact on foreign investment in the Indian market as foreign institutional investor (FII) and foreign direct investment (FDI) inflows are primarily driven by India’s stable growth potential vis-à-vis other emerging markets, Tyagi said.

But during President Trump’s last term, the rupee fell to Rs 73.02 from Rs 68.1775, noted Anuj Gupta, head of commodities and currencies at HDFC Securities. The rupee has since weakened further and was trading at Rs 83.72 on July 29.

However, the rupee is expected to strengthen as the Republican candidate wants a weaker US dollar, which will also impact the market as it could reduce the value of US assets and make them more attractive for foreign investment.

The increased demand for Indian assets will boost the value of the rupee as investors around the world seek higher returns in emerging markets like India. Moreover, with markets anticipating a possible interest rate cut by the US Federal Reserve in September, the rupee could strengthen further in the coming months.

A Fed rate cut would mean lower interest rates in the US, and therefore lower returns on US assets, which would drive investors to look for higher yields in markets such as India. Increased demand for Indian assets would boost the value of the rupee.

“If the Fed cuts interest rates in September, the initial reaction for the rupee could be positive as the US dollar and Treasuries will weaken,” Gupta explained.

US interest rates are not the only factor affecting the rupee, he said, adding that other Asian currencies, domestic macro factors, dollar inflows and intervention by the Reserve Bank of India could also influence the currency’s movement.