US Elections, China's $10T Plan, and Fed Cuts: What's at Stake for India
This week brings three critical events that could significantly impact Indian markets and investor sentiment: first, the results of the U.S. presidential election on Wednesday, November 6; second, the outcome of the Chinese Parliament's Standing Committee meeting, expected to announce a major stimulus package on Friday, November 8; and third, the U.S. Federal Reserve's policy meeting on Thursday, November 7, where a 25 basis points (bps) rate cut is widely anticipated.
These events hold particular importance for India as they will shape the trajectory of global trade and investments, which directly affect the Indian economy.
This confluence of events presents both challenges and opportunities for India. While global capital flows might see near-term volatility, India stands well-positioned to benefit from potential shifts in global manufacturing and trade patterns in the long term.
The U.S. Election Impact
If Donald Trump secures victory, it's expected that tariffs on Chinese imports would increase dramatically, potentially up to 200% for certain products, according to recent statements. This would create significant challenges for Chinese exports to the U.S., disrupting China's export-driven economy. On the other hand, if Kamala Harris wins, current tariffs would likely remain in place, maintaining the status quo.
For India, higher tariffs on Chinese goods could open significant opportunities. Indian exports, particularly in sectors like steel and electronics, would likely see increased demand from Western markets. Additionally, Chinese companies would need to establish alternate manufacturing bases to bypass these tariffs, potentially leading to increased investments in India’s manufacturing sector. This would not only create jobs but also facilitate valuable knowledge transfer as Chinese expertise in manufacturing moves to India.
The total stimulus is estimated to reach up to $10 trillion over the next 3-4 years, significantly larger than the 4 trillion yuan package implemented during the 2008 crisis.
China's Strategic Stimulus
China is closely monitoring the U.S. election results before finalizing its stimulus package. Should Trump win, analysts predict that Beijing's stimulus package could increase by 10-20% to counterbalance the potential economic impact of heightened tariffs. This package, estimated at $1-2 trillion on an immediate basis, would be directed towards recapitalizing banks to spur lending, supporting the ailing property sector, and boosting consumer spending.
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While a larger stimulus may attract some capital flows away from Indian markets, especially in the near term, a Trump victory could still benefit India in the longer term due to increased export opportunities and potential shifts in manufacturing investments from China to India. The total stimulus is estimated to reach up to $10 trillion over the next 3-4 years, significantly larger than the 4 trillion yuan package implemented during the 2008 crisis.
The Fed Factor
This week's anticipated 25 bps rate cut by the U.S. Federal Reserve would mark another step in the Fed's dovish pivot. Despite a recent 50 bps cut in September, the 10-year U.S. Treasury yield has edged up to around 4.3% in response to strong economic data. Another rate cut this week would likely put downward pressure on U.S. yields, potentially making Indian bonds more attractive to foreign investors in search of higher returns.
A softer U.S. yield environment could help offset the potential impact of China's new bond issuance, as lower yields in the U.S. make emerging market debt relatively more appealing. With Indian bond yields offering a premium, foreign portfolio investments (FPI) in Indian debt may see a boost, even as investors continue to assess global volatility.
This confluence of events presents both challenges and opportunities for India. While global capital flows might see near-term volatility, India stands well-positioned to benefit from potential shifts in global manufacturing and trade patterns in the long term.