Short coverage probably, but the rate flip-flop has to weigh

Mumbai: Indian shares entered Monday with muted optimism after a US Supreme Court ruling declared US President Donald Trump’s tariffs illegal, triggering a new twist in the trade story. Trump followed with a 10% levy and later increased it to 15% for all countries. This is actually lower than the rates agreed earlier this month, but the new uncertainty around tariffs, together with simmering tensions between the US and Iran, are likely to keep any optimism in check. “The framework that India and the US reached earlier this month was already neutral, but now those rates are also in question,” said A Balasubramanian, MD & CEO, Aditya Birla Sun Life AMC. “The market will likely see a short covering action, but the gains are not expected to be excessive. The upside could be in the region of 1%.”

Last week, the Sensex and Nifty rose as much as 0.4% in rollercoaster trading, while Brent crude futures firmed and remained above $71 on Friday on fears of a possible US military strike on Iran.

The market has remained volatile for most of February even after India and the US signed a trade deal that cut tariffs from 50% to 18%. Higher US tariffs on Indian imports were previously seen as a major concern for the stock market.

Although rates are now considered even lower, at 15%, this measure will not immediately trigger a runaway rally.

“The reduced rates from 18% to 15% are expected to be neutral from the equity market perspective. It remains unclear whether there will be a renegotiation of the contours of the India-US trade deal, which was expected to be signed soon,” said Sunny Agrawal, Head of Fundamental Research at SBI Securities. “Investors will need to brace for extreme volatility due to frequent changes in policy stance and resulting macro and sector-specific impact.”

Balasubramanian said the initial knee-jerk reaction could give way to consolidation as investors look to earnings and currency cues for direction. “In terms of valuations, markets are neither very expensive nor cheap, but the animal spirit is missing due to lower nominal GDP figures due to low inflation and investors waiting for an earnings improvement,” he said.