Indian Stock Market Experiences Significant Decline Amid New US Tariffs
The Indian stock market witnessed substantial losses on Thursday, August 28, 2025, marking the second consecutive session of decline. The benchmark Sensex plummeted by 706 points, or 0.87%, to close at 80,080.57, while the Nifty 50 fell by 211 points, or 0.85%, settling at 24,500.90. The market capitalization of BSE-listed firms dropped by approximately ā¹4 lakh crore, leading to investor losses. Broader markets also suffered, with the BSE Midcap and Smallcap indices declining by 1.09% and 0.96% respectively. Sectors such as IT, FMCG, and PSU Banks were particularly hit, each declining over 1%.
US Tariffs on Indian Goods Identified as Key Factor for Market Downturn
The primary catalyst for the market's fall was the implementation of a new round of US tariffs on Indian goods. These tariffs, which came into effect on Wednesday, August 27, raised overall duties to a steep 50% on certain Indian exports to the US. This move is largely seen as a consequence of India's continued purchase of Russian crude oil. While some analysts believe the market may be in the process of discounting the impact of these tariffs, the elevated duties are among the highest in Asia and have exacerbated negative investor sentiment, alongside foreign capital outflows and weak earnings. Exports of textiles, gems and jewellery, and auto parts are expected to be among the worst-hit sectors.
RBI Acknowledges Tariff Risks, Reiterates Support for Economy
The Reserve Bank of India (RBI) has acknowledged the downside risks to the Indian economy stemming from the US trade policies. In its August bulletin, the central bank noted that "persisting uncertainties related to India-US trade policies continue to pose downside risk" to overall demand. However, the RBI also highlighted supportive domestic factors, such as an increase in real rural wages, the ongoing transmission of past rate cuts, and conducive financial conditions, which are expected to bolster aggregate demand. RBI Governor Sanjay Malhotra stated on August 25 that the central bank is prepared to step in and provide financial support to the worst-impacted sectors if the tariffs significantly affect them, drawing parallels to support provided during the COVID-19 pandemic.
Separately, the RBI is reportedly considering restricting shadow banks from duplicating the business activities of their parent companies. This move aims to reduce risks within the non-banking financial company (NBFC) sector and harmonize regulations with those for banks, particularly concerning complex lending structures that could arise from duplicate businesses.
India's Long-Term Economic Outlook Remains Positive Despite Challenges
Despite the immediate headwinds from global trade tensions, India's long-term economic prospects remain robust. An EY report, "EY Economy Watch August 2025," projects India to become the world's second-largest economy by 2038 in terms of purchasing power parity (PPP), with a GDP potentially reaching $34.2 trillion. The report attributes this strong outlook to India's solid economic fundamentals, including a young workforce (average age 28.8 years), high savings and investment rates, favorable demographics, and a relatively stable fiscal position. While the US tariffs could impact approximately 0.9% of India's GDP, the actual effect is expected to be minimal if India diversifies its exports and strengthens domestic demand.
Industrial Production Sees 4-Month High Growth
On a positive note, India's industrial production recorded a 3.5% growth in July, marking a four-month high. This improvement was primarily driven by the manufacturing sector, which showed significant expansion. This indicates underlying strength in domestic industrial activity despite external pressures.