Could India be a hedge against trade wars and tariffs?

This report is from this week’s CNBC’s “Inside India” newsletter which brings you timely, insightful news and market commentary on the emerging powerhouse and the big businesses behind its meteoric rise. Like what you see? You can subscribe here.

America’s trade war with the rest of the world threatens to shake up long-held alliances, disrupt global supply chains, and reinvent methodologies for calculating the appropriate level of reciprocal tariffs. Now add another entry to the list of economic dogma being rumbled by U.S. President Donald Trump’s duties: the idea of a safe-haven investment.

Historically, the U.S. dollar has strengthened, and Treasury prices have rallied, as investors scrambled to buy assets perceived to be safe during financial turmoil.

Not anymore, it appears.

In the market chaos since “liberation day” of April 2, several new patterns have emerged, and one shows that investors are viewing India as a hedge against a potential future flux in trade flows.

Indian stock markets, currency and bonds — while not being a perfect measure of the new trend — have outperformed U.S. equities, the dollar and Treasurys this year.

Indian equities have also been less volatile, compared with their Asian peers.

Analysts say that a key reason behind these moves was India’s relatively insulated economy, which we previously discussed in last week’s “Inside India.”

Morgan Stanley points out that only 12% of India’s economy is dependent on exports of goods. Further, merchandise exports to the U.S. made up an even smaller proportion— 2.1% of GDP. Strip out pharmaceutical imports and energy, both of which are tariff-exempt for now, and the tariff-impacted goods make up only 1.7% of India’s GDP.

Upasana Chachra, the Wall Street bank’s chief India economist, said India would have the “lowest” exposure to the U.S. among Asian economies, and the “direct impact of higher tariffs on the export demand will be low”.

The country also appears to exhibit qualities that could see it develop into an emerging market safe haven in the future.

For instance, India’s economy is consumer-driven and less reliant on exports than other emerging market economies to drive growth. This makes it relatively well-insulated from external shocks, such as trade wars, according to experts.

Meanwhile, more than four-fifths of its equity market is domestically owned. Domestic investors — who have regularly poured billions through systematic investment plans — typically shield asset prices from the whims of foreign investors during events that exacerbate volatility.

“The fortunes of India’s equity market are for the most part decided domestically,” said Alexander Redman, chief equity strategist at CLSA.

Morgan Stanley’s Chachra also pointed out that the recent decline in oil prices, preceding concerns of a global growth slowdown, is likely to be positive for India, given that energy accounts for a large share of India’s import bill. The inverse relationship between global growth and the benefit to the Indian economy appears to be another arrow in India’s quiver.

India imported $277 billion worth of fuel in 2022. This accounted for 38% of all imports into the country for that year, according to World Bank data.

“Slower global growth often leads to lower global commodity prices, as is evident in the decline in oil prices of ~22% YTD, which affects the terms of trade for India positively (because India is a net commodity importer),” Chachra added.

The long decline in India’s stock market, which preceded the U.S. presidential elections and was driven by concerns over lofty valuations, has also brought down stock prices to more amenable levels.

“India has the most negative [earnings per share] revisions … across emerging and developed markets with the exception of Indonesia,” CLSA’s Redman said.

Analysts have moved their earnings per share forecast downward for 60% of companies in the MSCI India index, compared to 55% of companies in the MSCI Emerging Markets Asia index, according to FactSet data.

This has perhaps offered a floor for stock prices and mellowed the sell-off ravaging global markets in recent weeks.

The question investors are perhaps asking themselves is whether these trends are likely here to stay, or will the world go back to its old ways?

Inflation in India cools. India’s annual inflation rate fell to a lower-than-expected 3.34% in March, the country’s Ministry of Statistics and Programme Implementation reported Tuesday. The reading fell for a fifth straight month and came in slightly below the 3.61% seen in February, as growth in food prices continued to soften. Economists polled by Reuters had expected a reading of 3.6%

India’s factory output slows down. The Index of Industrial Production, which measures factory activity, showed a 2.9% increase in February, dropping sharply from the 5.2% growth in January. Slowdowns in the manufacturing and mining sectors contributed to the decline, according to data from India’s Ministry of Statistics and Programme Implementation.

Apple speeds up iPhone shipments from India. In March, the Cupertino-based company exported 600 tons of iPhones, worth nearly $2 billion, from India to the U.S. before U.S. President Donald Trump’s so-called “reciprocal tariffs” kicked in, according to a Reuters report. Correspondingly, Foxconn and Tata, Apple’s main suppliers in India, experienced a surge in their export value that month.

Indian stocks are on course for their best weekly performance since July 2022. The Nifty 50 index is up 4% this week, but the benchmark is still down by 1.3% this year.

The benchmark 10-year Indian government bond yield has fallen by 6 basis points over the past week to 6.38%, the lowest since December 2021.

On CNBC TV this week, Shilpak Ambule, India high commissioner to Singapore, said that Sembcorp, a Singapore-based energy and urban development company, is “actively looking at three or four sites in India” to build new industrial cities. He added that the Indian government is in “advanced stages of negotiation” with Sembcorp on those fronts.

Meanwhile, ChrysCapital Managing Partner Kunal Shroff noted that Indian companies pursuing initial public offerings can rely more on domestic support compared with a decade ago, when the market was determined by foreign institutional investors.

Flash purchasing managers index data for many countries will be released on Wednesday, shedding light on how the manufacturing and services sectors are holding up in the immediate weeks after U.S. President Donald Trump’s tariff announcements.

April 18 : Japan consumer price index for March, China one- and five-year loan prime rate decision

April 23: India HSBC PMI flash for April, U.S. S&P Global PMI flash for April, Japan Jibun Bank PMI flash for April, euro zone HCOB PMI flash for April, U.K. S&P Global PMI flash for April