Beyond the Budget: What the US Elections Mean for Indian Markets

The outcome of the election, which is just 100 days away, will have implications for currency fluctuations and US-India relations under the new US government, and could also significantly impact domestic companies and sectors involved in overseas operations.

For example, restrictive visa policies could hurt India’s software services sector, while a corporate tax cut in the US could boost export opportunities. In addition, increased healthcare spending could benefit Indian pharmaceutical companies.

Historical trends show that US election results tend to impact Indian equities, said R. Janakiraman, head of emerging market equities, India, Franklin Templeton. The US election outcome will be judged based on the impact on new trade policies, tariffs, trade agreements, geopolitical stability and currency fluctuations, he said.

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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 48% support among Americans, while Vice President Harris has 47%. In another recent poll, conducted by Reuters/Ipsos, 44% favored Harris, while 42% supported Trump.

“In my opinion, if Trump wins, US markets would take it positively because he would be seen as a better player in terms of earnings growth and corporate profitability,” said Prashant Khemka, founder of WhiteOak Capital Management.

If the US stock market does well, it will have a global impact on other markets, including India. Moreover, a more assertive US stance towards China could benefit India, Khemka said.

As the United States adopted an anti-China stance under the previous Trump administration, Indian boards began looking for potential opportunities, adopting a “China plus one” strategy that encourages companies to expand production beyond the Asian giant, he added.

The new US administration’s priorities on geopolitics and international relations could have an impact on foreign institutional investment in emerging markets, including India, said Sandip Bansal, senior portfolio manager at ASK Investment Managers.

Even if the US government raises import tariffs, India could still benefit as it is likely to have relatively lower tariffs on exports compared to countries like China, he said, adding that India is the best long-term example among large emerging markets.

The Trump Factor

However, former businessman-turned-politician Trump’s penchant for US-centric policies such as trade protectionism, stricter visa rules and curbs on foreign investment could weigh on Indian equities, said Jiten Doshi, co-founder and chief investment officer at Enam AMC.

But he also said Trump’s policies often aim to promote friendly business alliances and that during his previous term he made significant efforts to defuse tensions in regions such as the Middle East-Israel, North-South Korea and Russia-NATO.

During Trump’s previous presidential term, from January 2017 to December 2021, the Nifty 50 returned an impressive 112% and the Sensex 119%. This period covered Narendra Modi’s first two terms as Prime Minister of India, followed by his historic third term in office earlier this year.

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Regardless of the election outcome, the US is unlikely to change its policy of diversifying manufacturing away from China, which should help India not only attract capital but also increase its share of global trade, said Jay Kothari, global head of international business at DSP Asset Managers.

“Interestingly, in Asia, India has a lower beta (impact) on global news flow, or say recession, because of its relatively lower share of exports in GDP. This also means that India is still more inward-looking. Malaysia, Hong Kong, Singapore and Taiwan, on the other hand, have a higher beta because exports as a percentage of GDP are much higher in these countries,” Kothari explained.

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

Weaker dollar

As the US presidential campaign heats up, Trump’s preference for a weak US dollar has attracted widespread attention.

A weaker dollar would be beneficial for emerging markets like India as it would boost market sentiment, boost global trade and help boost corporate profits.

During Trump’s previous term as president, the dollar index weakened in the first few quarters before stabilizing, noted Ajay Tyagi, head of equities at UTI Asset Management. Given that Trump wants to weaken the dollar to boost the country’s export competitiveness, a similar currency move could happen again if he wins, he added.

Tyagi, however, said this would not have a significant impact on foreign investment in Indian markets as the inflow of foreign institutional investors (FII) and foreign direct investment (FDI) is primarily driven by India’s stable growth potential compared to other emerging markets.

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During Trump’s previous term, the rupee had depreciated from 68.1775 to 73.02, noted Anuj Gupta, head of commodities and currencies at HDFC Securities Ltd. The currency has depreciated even more since then. On July 29, the rupee was trading at 83.72 to $1.

But with the Republican candidate expressing a preference for a weaker US dollar, the rupee is expected to strengthen. This would also have an impact on markets, as a weaker dollar could make US assets less valuable and foreign investments more attractive.

With global investors looking for higher yields in emerging markets like India, increased demand for Indian assets would boost the rupee. Moreover, with the market anticipating a potential rate cut by the US Federal Reserve in September, the rupee could appreciate further in the coming months.

A Fed rate cut would mean lower US interest rates and therefore lower yields on US assets, prompting investors to seek better yields in markets like India. This increased demand for Indian assets would boost the rupee.

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

He added that the US interest rate is not the only factor affecting the rupee but other Asian currencies, domestic macroeconomic factors, dollar flows and any intervention by the Reserve Bank of India can also impact the rupee’s exchange rate.

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