India: Economic fundamentals remain solid, but diplomacy takes precedence

■ As of this writing, India trails behind other emerging markets in stock and currency performance in 2025.  

■ While rapid economic growth and slowing inflation support the Indian economy, prolonged trade negotiations with the US pose a challenge.  
 
    India's underperformance is notable compared to the recent strength of other emerging markets. As of September 1, major emerging market stock indices in local currency terms show Chile (+33.0%), South Korea (+31.0%), and Hungary (+30.7%) outperforming, while India (+2.8%) lags notably behind. In currency terms, the Hungarian forint (+15.1%), Brazilian real (+11.9%), and Mexican peso (+10.5%) have strengthened against the US dollar as of September 1, whereas the Indian rupee (-3.0%) continues to weaken. 

 
    India's economic fundamentals remain robust in 2025. Real GDP grew by 7.8% in the second quarter (April-June), surpassing market predictions of 6.7% and reaching a five-quarter high. The July CPI rose by 1.55% year-on-year, below the central bank's target range of 2-6%, indicating potential for further interest rate cuts. In this context, the Modi government announced on August 16 plans to revise the Goods and Services Tax (GST) in October, significantly reducing the tax burden. Additionally, on August 15, a leading US ratings agency upgraded India's credit rating to "BBB," its first upgrade in 18 years. While other major agencies have not yet followed suit, these developments could positively influence Indian financial markets.  

 
    Despite these positives, India's stock market and currency continue to underperform compared to other emerging markets, likely due to headwinds from the US tariffs. The US imposed a 25% tariff on Indian imports on August 7, with an additional 25% effective August 27, raising the maximum tariff rate to 50%. Data from Japan's Cabinet Office shows India accounted for only 1.8% of global merchandise exports in 2022, suggesting an economy primarily driven by domestic demand. However, in fiscal 2023, India's exports to the US made up 17.7%, its largest export market, raising concerns about the impact of tariffs. Prime Minister Modi attended the Shanghai Cooperation Organization (SCO) summit on August 31, emphasizing his commitment to maintaining a balanced diplomatic stance among China, Russia, and the US. The market generally anticipates that trade negotiations with the US will be lengthy, and therefore, the recovery of India's stock market and currency will hinge on the government's diplomatic strategy. A key to short-term market recovery is likely to be the prospect of tariff reductions from the US.