Market Reactions to Trump’s Election Victory: Impact on India’s Economy and Stock Markets

By Chetna Gill

Cover Image Attribute: Then-U.S. President Donald Trump shakes hands with Indian Prime Minister Narendra Modi during a press conference at Hyderabad House in New Delhi on February 25, 2020. / Source: Voice of America

The Indian stock market experienced a sharp decline following the U.S. election results, which saw former President Donald Trump return to office as the Republican candidate. This decline was primarily due to the uncertainty and potential policy changes that a Trump victory might bring. As Indian markets faltered on November 7, with the BSE Sensex falling to 79,583.40 (a decrease of 794.73 points or 0.99%) and the Nifty slipping to 24,215.80 (down 1.1%), U.S. markets posted notable gains.  On the same day, the NASDAQ jumped by 2.95%, the S&P 500 rose by 2.53%, the Dow Jones surged by 3.57%, and the Russell 2000 climbed by 5.84%.

Just a day prior, on November 6, Indian markets had rallied, with the Sensex closing at 80,378.13, up by 1.13%, and the Nifty gaining 1.12% to reach 24,484.05. However, the post-election dip in India’s markets was driven by several factors. These factors include expectations of a U.S. Federal Reserve rate cut by 25 basis points, a weakened rupee at 84.3587 per dollar, and significant foreign investor outflows totaling ₹4,445.59 crore, according to Moneycontrol. In contrast, U.S. market optimism was fueled by anticipated pro-business policies and deregulation, as reported by CNN.

Among the sectoral indices in India, Nifty Metal, Pharma, and Midsmall Healthcare led declines, falling by 2.75%, 1.75%, and 1.32%, respectively. Except for PSU banks, all sectors were down, with Tech Mahindra, Tata Motors, Sun Pharma, and IndusInd Bank among the biggest losers. Analysts attributed the decline to a technical pullback as some investors took profits from the previous rally, while concerns over foreign inflows grew. 

Market analysts are closely watching the impact of the U.S. election, focusing on how a Trump victory might influence India’s economy and stock markets. SBICaps analyst Sunny Agrawal suggests that a stronger dollar and increased U.S. Treasury yields, driven by potential tariff hikes under Trump, could dampen foreign investments in India. This could lead to a reduction in capital inflows and affect market sentiment, making investments in emerging markets like India less appealing to foreign investors.

Analysts also anticipate that a Trump-led administration could increase U.S. domestic spending, which might drive inflation upward. Higher inflation could push up interest rates and support a stronger dollar. In addition to currency fluctuations, there are expectations of increased trade barriers under Trump, which could reshape global trade relationships and put additional pressure on emerging markets. Analysts believe these dynamics could shift investor priorities and create a more complex landscape for countries like India with strong trade ties with the U.S.

On a more positive note, economist Anitha Rangan of Equirus points out that markets may ultimately respond more to a transparent election outcome than to the specific winner. She suggests that a decisive result could ease volatility and stabilize markets regardless of who wins. This outlook is reflected in India’s recent stock performance, as evidenced by the BSE Sensex gaining 682 points after indications of a clearer election result. Rangan also expects that with reduced uncertainty, India’s trade ties with the U.S. may strengthen, bolstering investor confidence and instilling a sense of hope for the future.

Finally, Rangan reiterates her confidence in India’s fundamental economic resilience, suggesting that recent market adjustments due to foreign outflows may soon reverse. She is optimistic about the longer-term effects of Trump’s re-election on India-U.S. relations, predicting that a stable trade relationship will benefit India’s economy. Rangan's confidence in India's economic resilience is likely to instill a sense of confidence in the audience. She also notes that if the U.S. Federal Reserve takes a gradual approach to interest rate cuts, India may adopt a similar pace, maintaining alignment with U.S. policies and potentially keeping Indian markets more attractive to investors seeking stability.

Parallel Development

According to sources, India is prepared to offer U.S. companies more accessible market entry, a move that could significantly benefit American businesses. This offer is contingent on reciprocal action from Washington under the leadership of President-elect Donald Trump, who has been vocal about India's high tariffs. Trump, who is set to make a dramatic political comeback, recently labeled India as a "major abuser" in trade relations and vowed to increase tariffs on all U.S. imports during his campaign.

During his first term from 2017 to 2021, President Donald Trump frequently clashed with India over tariffs but maintained a strong relationship with Prime Minister Narendra Modi. By the end of his term, both countries were working toward a limited trade agreement to resolve their differences. Despite tariff disputes, India's consistent openness to negotiations that could lead to better trade terms, including potential tariff reductions in sectors such as automobiles, is a reassuring sign of their commitment to resolving trade disputes, according to sources familiar with the matter.

Harsh Vardhan Shringla, India's former ambassador to the U.S., is optimistic about the potential for a free trade agreement under Trump's second term. He believes that the mutual respect developed between Trump and Modi could further strengthen bilateral ties. Shringla noted that India was on the verge of finalizing a mini trade deal with the U.S. during Trump's first term, but the onset of the COVID-19 pandemic disrupted progress. He is hopeful that a second term could see the successful conclusion of a free trade agreement.

Indian officials are not overly worried about the future of trade relations with the U.S. in Trump's next term, as his tariff focus is primarily aimed at China. Sources suggest that India is confident in Trump's transactional trade approach, which it sees as advantageous, and believes it could lead to fruitful negotiations. Although India's external affairs and trade ministries have not commented, analysts are hopeful that the U.S.-India trade relationship will continue to evolve positively under Trump's leadership.

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