- Tariff relief eases export pressure but may not lift equity valuations.
- Indian earnings growth lags peers – 8.3% vs 16%‑30% in Asia.
- Tech giants TCS and Infosys face a global AI‑driven sell‑off.
- Foreign outflows hit $19 bn, yet a fresh inflow streak hints at a turnaround.
- Bull case hinges on policy wins and budget; bear case on muted earnings recovery.
You missed the early warning signs in India’s market rally—now is the time to act.
Why the MSCI India Index Still Trades at a Premium
The MSCI India Index currently trades around 22 times forward earnings, roughly in line with its historical average. However, when compared with other emerging markets, this multiple feels pricey because growth expectations have slipped. Bloomberg data projects an 8.3% earnings expansion over the next 12 months, starkly lower than the 16% forecast for China, the 108% surge anticipated for South Korea, and the near‑30% growth in Taiwan. The premium reflects investors’ lingering belief in India’s long‑term demographic dividend, yet the gap between valuation and realistic earnings trajectory is widening.
How the US‑EU Tariff Relief Impacts Indian Exporters
The recent US executive order slashing a punitive 25% tariff to 0% and reducing the reciprocal duty to 18% offers concrete relief for Indian manufacturers. Previously, many exported goods faced a 50% levy, the highest in Asia, compressing margins and weakening the rupee. By removing the tariff loop—where rupee depreciation spurred foreign selling, which in turn deepened currency weakness—the trade deal can stabilize the exchange rate. Still, the real‑effective exchange rate remains near a decade low, suggesting modest upside before the currency re‑equilibrates.
Earnings Growth Gap: India vs China, South Korea, Taiwan
India’s 8.3% earnings outlook trails its regional peers for three reasons:
- Corporate fundamentals: Profit growth in Indian software services has stalled, dragging the broader index.
- Geopolitical headwinds: Ongoing trade tensions and domestic policy uncertainties dampen confidence.
- Currency dynamics: A weakening rupee erodes dollar‑denominated returns for foreign investors.
Historically, when India’s earnings growth fell below 10% for two consecutive years (e.g., 2013‑14), foreign inflows contracted sharply, and the index underperformed the MSCI Emerging Markets benchmark by over 15%.
Tech Sector Turbulence: TCS, Infosys and the AI Disruption
India’s marquee software exporters—Tata Consultancy Services (TCS) and Infosys—are caught in a global sell‑off triggered by rapid AI advancements, notably from startups like Anthropic. These firms traditionally thrive on cost‑effective outsourcing, but AI‑driven automation threatens to replace routine coding and testing services, compressing margins. While both companies have announced AI‑focused initiatives, the transition will likely be gradual, leaving a near‑term earnings dip.
Competitor analysis shows that peers such as Wipro and HCL Technologies are also feeling the pressure, but their exposure to high‑value consulting services provides a modest buffer. In contrast, U.S. tech giants (e.g., Microsoft, Google) are accelerating AI integration, potentially reshaping the outsourcing market landscape for years to come.
Investor Playbook: Bull and Bear Cases for Indian Equities
Bull case – The combination of tariff relief, a supportive fiscal budget, and a tentative resurgence of foreign inflows creates a catalyst for a sector‑wide rally. Quality firms with strong balance sheets—such as HDFC Bank, Reliance Industries, and the aforementioned TCS/Infosys—could outperform if earnings accelerate in FY2025‑26. Additionally, a stabilising rupee would improve the dollar‑return profile for overseas investors.
Bear case – If earnings growth remains selective and AI disruption continues to erode software margins, the MSCI India Index may lag its peers despite the trade truce. Persistent geopolitical risk and a potential resurgence of protectionist policies could reignite capital outflows, keeping the rupee under pressure and further widening the valuation gap.
Bottom line: Stay vigilant. Position selectively in high‑quality, export‑oriented companies while monitoring rupee trends and AI adoption metrics. The next 12 months will likely separate resilient winners from the laggards in India’s evolving market landscape.