Amit Goel, Portfolio Manager, Fidelity International, comments:
“The Indian equity market came under pressure in 2025 amidst a domestic growth slowdown and adverse US policy actions. Both consumption and capital investment showed signs of fatigue after two to three years of strong expansion, leading to weaker corporate earnings growth.
The US imposed 50% tariffs on Indian imports, including a 25% penalty on Russian oil purchases, and introduced a USD 100,000 fee on new H-1B visa applications. The latter raised concerns as Indians account for nearly 70% of visa holders. The US remains a key trading partner, accounting for 20% of India’s goods exports and 50% of its services exports. Tariffs have particularly affected labour-intensive sectors such as textiles, gems and jewellery. While services exports remain exempt, rumours of a potential outsourcing tax persist.
Our corporate interactions indicate that additional H-1B visa costs are manageable for Indian IT services firms, which continue to reduce dependence on H-1Bs through increased local hiring in the US and greater nearshore/offshore recruitment. However, an outsourcing tax would pose a more material challenge if implemented. Encouragingly, recent reports suggest that New Delhi is moving closer to securing a tariff resolution with Washington.
India’s economy remains largely domestic-driven, with private consumption accounting for about 60% of GDP and gross fixed capital formation contributing 30%. In contrast, merchandise and services exports represent roughly 12% and 9.5% of GDP, respectively. This domestic orientation - supported by favourable demographics and rising consumption - underpins India’s position as one of the fastest-growing major economies globally.
The government appears to have recognised both internal and external challenges and has responded with structural reforms and fiscal stimulus. On 21 November, it implemented the four labour codes consolidating 29 existing laws. These reforms are expected to simplify compliance, address industrial disputes, and boost manufacturing competitiveness. For employees, they expand social security coverage, broaden enforcement of minimum wages, and promote gender pay parity.
Earlier in the year, the government increased the income threshold for tax exemption to enhance middle-class disposable income. In September, it simplified the Goods and Services Tax (GST) structure and lowered rates, making key consumer goods - including automobiles and durables -more affordable. In October, it approved the 8th Pay Commission, which will raise government employee salaries from 2026.
On the monetary front, the sustained decline in inflation has enabled the Reserve Bank of India to cut policy rates by 100 basis points over the past year and reduce the cash reserve ratio to improve credit availability. These measures should further support domestic demand and investment.
Overall, recent US policy actions have created short-term headwinds for India’s external sector, particularly if an outsourcing tax is implemented. While we await a trade deal with the US, India's domestic demand-led growth model remains intact. The government’s policy measures are aimed towards a recovery in consumption and promoting investments. Indian equities continue to be supported by strong structural fundamentals and high returns on equity and periods of cyclical weakness may therefore offer attractive opportunities for systematic accumulation and medium-term alpha generation.”
