US Markets Gain Sharply on Hopes of Tariff Talks: Will Dalal Street Continue Rally?

The global financial markets have experienced significant volatility in recent days following US President Donald Trump’s announcement of sweeping tariffs on April 2, 2025. After several days of decline, US markets have rebounded sharply on hopes of potential tariff negotiations, with ripple effects being felt in Indian markets as well. This analysis examines the current market dynamics and evaluates whether the rally on Dalal Street is likely to continue.

Recent US Market Movements

The Tariff Announcement and Initial Market Reaction

On April 2, 2025, President Donald Trump announced a sweeping tariff policy that imposed a minimum 10% duty on most imports into the United States, with targeted rates of up to 50% for certain countries PBS News. This announcement, dubbed “Liberation Day” by the administration, sent shockwaves through global markets, with the US stock indices experiencing significant losses over the following days CNN.

The Recent Market Rebound

After several days of decline, US markets staged a remarkable recovery on April 8, 2025:

• The Dow jumped by approximately 930 points (2.45%)
• The S&P 500 gained about 2.3%
• The Nasdaq Composite rose around 2.5% CNN

In futures trading early on April 8, Dow E-minis were up 644 points (1.69%), S&P 500 E-minis added 56.5 points (1.11%), and Nasdaq 100 E-minis gained 156.5 points (0.91%) Reuters.

Driving Factors Behind the US Rally

The primary factor driving this market rebound is investor optimism regarding potential negotiations over the recently announced tariffs. Key developments include:

1. US-Japan Tariff Talks: Japan is sending a negotiation team to the US, with Treasury Secretary Scott Bessent and US Trade Representative Jamieson Greer appointed to lead discussions. Japan is among 50-70 countries that have approached the Trump administration for negotiations Reuters.
2. Hopes for Broader Negotiations: Treasury Secretary Bessent indicated that “for countries that don’t retaliate, the US is at a maximum tariff level,” expressing hope that “through good negotiations, tariff levels will come down” Reuters.
3. Technology Sector Rebound: Major technology stocks such as Tesla, Amazon, Meta Platforms, and Nvidia saw gains of nearly 2% in premarket trading, contributing significantly to the overall market recovery Reuters.

However, uncertainty persists, particularly regarding US-China relations. China has vowed to “fight to the end” against US tariffs and rejected what it calls the “blackmail nature” of Trump’s threat to increase tariffs on Chinese imports to over 100% Reuters.

Indian Market Response and Performance

Recent Performance of Dalal Street

Following the global trend, Indian markets experienced a significant downturn on April 7, 2025, followed by a strong rebound on April 8:

• The S&P BSE Sensex jumped by 1,586.69 points to reach 74,724.59
• The NSE Nifty50 climbed by 486.10 points to 22,647.70 India Today

This rally was broad-based, with no stocks in the Sensex or Nifty50 trading in red during the afternoon session on April 8. The recovery followed a significant market crash on April 7, which was described as the worst selloff in Indian markets in 10 months Reuters.

Sectors Leading the Indian Rally

The rally in Indian markets was led by a diverse group of sectors:

1. Consumer Durables: Titan led the rally with a gain of 4.48% on Sensex and 4.27% on Nifty
2. Technology: Infosys surged by 3.93%, and HCLTech advanced by 3.15%
3. Food Delivery: Zomato gained 3.93% on Sensex and 3.60% on Nifty
4. Banking/Financial: State Bank of India (SBI) increased by 3.57%, while Shriram Finance emerged as the top performer on Nifty with a gain of 4.80%
5. Infrastructure: Larsen & Toubro climbed by 3.88% on Sensex and 3.76% on Nifty India Today

Additionally, various sectoral indices such as Nifty IT, Consumer Durables, Oil & Gas, Media, Pharma, Financial Services, Private Bank, FMCG, PSU Bank, Healthcare, Auto, Metal, and Realty posted significant gains India Today.

Market Volatility and Sentiment

India VIX, the market’s fear gauge, plummeted by 9.05% on April 8, marking a dramatic reversal from the previous day’s extraordinary surge of over 60%. This indicates a significant improvement in market sentiment and reduced investor anxiety India Today.

US-India Market Correlation and Implications

Historical Correlation Patterns

The relationship between US and Indian markets has historically been strong:

1. Strong Statistical Correlation: Between 2000 and 2024, the Nifty 50 posted a negative return in 21 out of 22 instances when the S&P 500 corrected by more than 10%, averaging a 10.7% decline The Hindu Business Line.
2. Global Impact of US Markets: With the US comprising 75% of the MSCI World Index, corrections in US markets have profound ripple effects on global markets, including India The Hindu Business Line.
3. Economic Survey Warning: The Economic Survey had warned of a meaningful market correction in 2025, which could have a cascading effect on sentiment and spending, partly due to this strong correlation The Hindu Business Line.

Impact of US Tariffs on Indian Sectors

The impact of US tariffs on Indian markets varies by sector:

1. IT Sector: The Nifty IT index faced significant losses (exceeding 2%) due to its high exposure to the US market GlobalData.
2. Metals Sector: The Nifty Metal index suffered substantial losses due to fears of reduced industrial demand amid concerns of a potential US recession GlobalData.
3. Export-Oriented Sectors: Industries heavily reliant on the US market, such as IT and textiles, may face immediate challenges, while domestic demand-driven sectors like FMCG and infrastructure could show greater resilience GlobalData.

Institutional Investor Flows and Market Support

FII and DII Activity

Foreign Institutional Investors (FIIs) and Domestic Institutional Investors (DIIs) have shown divergent patterns in FY2025:

1. FII Selling: FIIs were net sellers, offloading domestic equities worth approximately Rs 1,27,401 crore in FY2025 Economic Times.
2. DII Buying: DIIs remained consistent buyers, purchasing equities worth about Rs 6,06,368 crore during the same period Economic Times.
3. Recent Shift: In March, FII selling decreased to Rs 3,972.61 crore (from much higher levels earlier), and there was a noticeable shift with FIIs turning net buyers over a recent two-week period Economic Times.

This pattern of strong DII support has been crucial in stabilizing the Indian market during periods of FII outflows, contributing to market resilience.

Outlook: Will Dalal Street Continue Its Rally?

Factors Supporting Continued Rally

Several factors could support the continuation of the rally on Dalal Street:

1. US Market Recovery: If US markets continue to recover on hopes of successful tariff negotiations, particularly with key trading partners like Japan, this positive sentiment could spill over to Indian markets given the strong correlation.
2. Strong DII Support: The consistent buying by DIIs has provided robust support to the Indian market, helping to offset FII selling and stabilize prices. This trend is likely to continue in the near term.
3. Reduced Market Volatility: The significant drop in India VIX suggests reduced investor anxiety, which could encourage further market participation and support the rally.
4. Broad-Based Participation: The current rally is broad-based, with gains across multiple sectors, indicating strong underlying market sentiment that could sustain the upward momentum.

Challenges and Risks

However, several challenges could impede the continuation of the rally:

1. US-China Trade Tensions: China has vowed to “fight to the end” against US tariffs, raising the specter of an escalating trade war that could negatively impact global markets, including India Reuters.
2. Sector-Specific Vulnerabilities: Sectors with high exposure to the US market, such as IT and textiles, remain vulnerable to tariff-related disruptions GlobalData.
3. RBI Monetary Policy: The Reserve Bank of India’s monetary policy decisions could influence market direction, particularly if concerns about inflation or economic growth necessitate policy adjustments GlobalData.
4. Historical Correlation Risks: The strong historical correlation between US and Indian markets suggests that if US market optimism fades and gives way to renewed selling, Indian markets could follow suit The Hindu Business Line.

Expert Opinions

Market analysts offer mixed views on the sustainability of the current rally:

1. Short-Term Volatility: Analysts expect short-term volatility as investors assess the implications of tariffs and await developments in trade negotiations GlobalData.
2. Cautious Optimism: The rebound on April 8 suggests cautious optimism, but the sustainability hinges on global trade developments, RBI policy, and ongoing market volatility GlobalData.
3. Domestic vs. Export-Oriented Sectors: Domestic demand-driven sectors are expected to show greater resilience compared to export-oriented ones, suggesting a potentially uneven market performance across sectors GlobalData.

Conclusion

The recent sharp gains in US markets on hopes of tariff talks have triggered a corresponding rally on Dalal Street, reflecting the strong correlation between the two markets. While several factors support the continuation of this rally—including reduced market volatility, strong DII support, and hopes for successful tariff negotiations—significant challenges remain, particularly the uncertain trajectory of US-China trade tensions and sector-specific vulnerabilities to tariff-related disruptions.

The outlook for Indian markets remains mixed, with the sustainability of the current rally dependent on developments in global trade negotiations, particularly between the US and its major trading partners like Japan and China. Investors should maintain a cautious approach, focusing on sectors with strong domestic demand and limited exposure to US trade policies while closely monitoring global developments.

As the situation evolves, the Indian market’s direction will likely continue to be influenced by both global factors, particularly US market movements and trade policies, and domestic considerations such as RBI policy, institutional flows, and sector-specific dynamics.