Market Outlook – Early August 2025

Market Uncertainty & Trade Disruptions

There’s a shift underway in the way markets are reacting to geopolitical headlines. Investors are being forced to recalibrate assumptions, because global trade policies, especially those coming from the US are no longer anchored in consistency. This is especially relevant for Indian equity investors today, as US-India trade tensions have taken centre stage.

The sudden imposition of a 25% tariff on Indian imports by President Trump from August 1, 2025, has rattled sentiment. The trigger is India’s continued import of discounted Russian oil, something Trump wants curbed. Talks for a comprehensive India-US trade agreement have broken down, and this unpredictability is what’s causing deeper damage than the tariffs themselves. When trade negotiations fail and policy becomes volatile, markets are left second-guessing.

Large export-facing businesses especially in engineering goods, electronics, garments, auto components, and gems are watching closely. They are now dealing with a sudden cost disadvantage in their largest developed market. While pharma and petroleum products have been spared for now, no one knows what might change next week.

Where the Damage Is, and Where It Isn’t

The numbers reveal the extent of India’s tariff exposure. Around 1.87% of total exports are directly hit. But the effects are uneven. Firms heavily dependent on the US for finished goods face margin compression. Textile exporters, for instance, already operate on thin spreads. Any tariff-led increase in landed costs hurts their competitiveness. Exporters are now being forced to either absorb losses, renegotiate terms, or look for alternate buyers.

That said, India’s macro growth story isn’t derailed. Domestic demand remains steady. Analysts are adjusting GDP projections downwards only marginally, by around 0.2%. So while sector-level pain is real, broader growth is intact. This kind of decoupling is important for portfolio construction under market uncertainty.

Rare Earths, China, and Strategic Risks

A bigger, more structural risk is emerging around rare earth supplies. After China’s export restrictions in April 2025, critical supply chains for EVs, electronics, and autos are under strain. Magnet prices are up, and production disruptions have begun.

India’s counter is the ₹18,000 crore National Critical Mineral Mission, aimed at building domestic capabilities and tying up with reliable partners like Japan and Australia. But this will take years to stabilise. Until then, companies dependent on rare earths remain exposed. Investors should track this risk closely in manufacturing and auto portfolios.

Global Trade Is Entering A New World Order

The trade playbook has changed. Tariffs, strategic subsidies, and currency weaponisation are becoming the norm. Whether it’s the US, EU, or China, national interest now trumps global cooperation.

This fragmentation brings both risk and opportunity for India.

Risk: In the short term, increased uncertainty leads to pullbacks in FDI, capital outflows, and a wait-and-watch stance from global allocators.

Opportunity: India is seen as a stable, neutral destination amidst global disorder. As supply chains shift out of China, India is attracting more strategic attention. This won’t show up in monthly FII flows, but it’s influencing long-term capital formation in sectors like defence, electronics, and semiconductors.

Currency, Oil, and Trade Balance

The Indian rupee is trading near 88/USD, its weakest level ever. This 4.5% depreciation over the past year is driven by several factors:

• Higher US interest rates have kept capital flows tight.
  
• A widening current account deficit due to expensive imports.
  
• General global risk aversion.
  

This impacts import-dependent sectors first, especially electronics, oil, chemicals, and auto components. Expect some pass-through inflation in input costs. But the good news is Brent crude remains below $70/barrel, thanks to OPEC+ increasing supply and weak global demand. This gives India some cushion.

India’s growing reliance on Russian crude, about 40% of total imports is another variable. Payments are now routed via UAE dirhams due to sanctions and the non-functional rupee-rouble mechanism. While this workaround has helped secure cheaper oil, it also brings forex risks and opacity.

Government Capex and Consumption Holding the Fort

Despite the noise, India’s domestic economy is holding up well. Government capex continues to be the core growth driver, with projected spend between ₹11–20 lakh crore for FY26. Infrastructure, railways, defence, and energy are key beneficiaries. Healthy corporate balance sheets and high bank credit growth are keeping the momentum going.

Private capex, though, is still tepid. Employment remains a weak link, affecting urban consumption pockets. But rural demand is stable, and recent tax reliefs have kept middle-income spending afloat. This combination of policy push and resilient consumption is keeping India’s story alive even as global sentiment cools.

Financial Sector: Pockets of Strength, Areas of Concern

NBFCs are reporting robust 20% annualised loan growth. But within microfinance, stress is building. NPAs are rising, and borrower rejection rates are climbing. This segment needs closer monitoring. While most NBFCs remain well-capitalised, stock selection here needs to be careful.

Mutual fund SIP inflows saw a 12% drop in July. Equity funds pulled ₹6,626 crore, reflecting investor caution. Flows are shifting to international or thematic schemes. This tells us that the retail investor is looking for conviction, not momentum.

RBI has stayed put on rates at 5.5% in its August policy. Inflation estimates for FY26 have been cut to 3.1%, and liquidity remains ample. So credit availability is not a concern. The central bank is sticking to its 6.5% GDP growth estimate for FY26, signalling confidence in the domestic cycle.

Stock Market Outlook

The equity market is reacting to a lack of positive triggers. The Nifty slipped below 24,600 and is trading with a mild negative bias. IT, pharma, and FMCG saw profit booking. PSU banks and capital goods are holding steady.

We are now in a phase where index-level returns may flatten, but stock-specific alpha can still be generated. Investors should be prepared for more sideways movement, rather than broad-based rallies. Portfolio churn is likely to rise.

This is the time to:

• Stick to quality businesses with pricing power and strong governance.
  
• Rebalance allocations where there’s excessive sector exposure.
  
• Avoid chasing short-term narratives.
  

Conclusion

The trade conflict with the US has added another layer of complexity to markets already coping with rate cycles, currency shifts, and geopolitical risks. But India’s growth drivers, strong consumption, high public capex, and policy continuity are still intact.

For equity investors using portfolio management services (PMS), this is a phase to lean on disciplined frameworks like Roots & Wings and LSG. These offer a way to stay anchored to fundamentals while filtering out noise.

The key takeaway: Focus on earnings visibility, supply chain resilience, and businesses with global optionality. Market volatility may persist, but the long-term story hasn’t changed. Use this period to build durable portfolios rather than chase tactical returns.