By Craig Mellow
The 50% tariff Donald Trump slapped on India's exports to the U.S. is a problem for Indian stocks. It's not their biggest problem.
The onetime darling of emerging markets investors has turned laggard. The iShares MSCI India exchange-traded fund has fallen 10% over the past year, while global emerging markets advanced close to 20%.
Prime Minister Narendra Modi's government created some of the headwinds itself. Delhi reined in state spending last year with an eye on mounting deficits. That slowed gross-domestic-product growth, and corporate profits growth followed this year. The Reserve Bank of India meanwhile held its key interest rate at a restrictive 6.5% to tame inflation. "We've had a host of earnings downgrades over the last few quarters," says James Thom, senior investment director at Aberdeen Investments.
Another bearish indicator is beyond Modi's control: global investors' fixation on stocks linked to artificial intelligence. These AI stocks are abundant in Taiwan, South Korea, and, above all, in China, whose Hong Kong--listed shares have soared 35% over the past 12 months. Not in India. "India is still in the industrial age while China is having an AI Sputnik moment," says Ivo Kovachev, senior fund manager at J O Hambro Capital Management Group.
Modi and central banker Sanjay Malhotra are stepping on the macroeconomic gas. The government cut and simplified its goods and services tax, India's equivalent of VAT, which could reduce many consumer prices by around 10%, estimates Rob Brewis, head of emerging markets at Aubrey Capital. The RBI has eased by a full percentage point this year to 5.5% and loosened reserve requirements to juice banks' lending capacity.
"The government is doing all the right things," Brewis says. "We're still a lot less overweight India than we were."
Modi has been playing it smart geopolitically too, says Michael Kugelman, a senior fellow at the Canada-based Asia Pacific Foundation. He has "not uttered one word of criticism toward Trump," while also seeking "workarounds" like talks toward a free-trade agreement with the European Union.
A year of underperformance has made Indian valuations, formerly the world's richest, more attractive, argues Dina Ting, head of global index portfolio management at Franklin Templeton. Average price/earnings ratios are now in line with the U.S., she notes, while India's economy is expected to grow four times as fast through 2030. "The valuation reset enhances the risk/reward profile for new allocations," Ting says.
The caveat for many investors will be her time horizon: three to five years.
With more than 5,000 stocks to choose from, investors are finding some Indian names worth owning right now. Aberdeen's Thom favors the top two private banks, HDFC Bank and ICICI Bank. "We're seeing top-line credit growth without worries about asset quality deterioration," he says.
Brewis is hanging onto Eternal, parent company of e-commerce power Zomato, even after a 50% run-up in the shares over the past half-year. Zomato is in the forefront of India's "instant commerce" wave, promising delivery of everyday items and some food within 10 minutes.
No one, for now, doubts India's long-term growth trajectory as urbanization and an expanding middle class push up average incomes that are less than one-fourth of China's. Its next star turn as an equity market will have to wait a bit longer, though.
"The rotation back to India could happen," J O Hambro's Kovachev says. "We're still waiting for earnings to trough."
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September 25, 2025 11:30 ET (15:30 GMT)
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