August 2025

Stagflation for the US?

Mohit Dugar, CFA

Stagflation is an economic event in which the inflation rate is high, economic growth rate slows, and unemployment remains steadily high. Such an unfavourable combination is feared and can be a dilemma for governments since most actions designed to lower inflation may raise unemployment levels, and policies designed to decrease unemployment may worsen inflation.

Trump reciprocal tariffs kick in from 1^st August 2025, with a lot of major economies successfully securing a trade deal with USA – EU with 15% tariffs, Japan with 15% tariffs; however, a few economies like India were unable to secure any deal, as a result a 25% reciprocal tariff was imposed on India. The talks remain stalled due to dairy imports.

Analysts are unable to determine the impact of such tariffs on the US economy yet, but preliminary indications suggest that the ultimate brunt will be borne by the US consumers. There has been a constant push from President Trump to cut down rates and with inflation being within Fed’s control, the case for rate cut is becoming strong. But, the Fed is still unsure what will be the impact of these tariffs on the inflation, that’s why they are reluctant to cut the rates now. These tariffs have the power to push the US economy in to stagflation if GDP growth doesn’t rebound from the previous quarter’s contraction and if the inflation spirals out of control.

These tariffs have entirely rattled the markets – they have given up all their gains of previous month and closed in red for the month of July at 24,565 levels for NIFTY and 80,600 levels for SENSEX, down approximately 4% on a monthly basis. There are warning signs in the economy – Q1 earnings have been disappointing for India Inc. so far; Credit growth has slowed to 9% led by moderation in credit to manufacturing, telecom, NBFC etc., stemming from slower CapEx from the Government; Consumption has slowed down.

The markets were also spooked by the Jane Street episode where they had recently been under the scanner for alleged index manipulation involving BANKNIFTY, where profits exceeding ₹35,000 crore were scrutinised, but only a fraction – around ₹5,000 crore was deemed non-compliant due to 1:1 cash-to-F&O holding violations, but in a surprising twist, SEBI allowed Jane Street Group to resume trading activities in India within a short period of time. This move comes after imposing what many market observers called a “minimal penalty,” significantly smaller than initially anticipated.

However, there are some green shoots visible – Trade deficit at a 4 month low; Retail inflation at 2.1% which is a six year low figure; This is the last quarter of a higher base, from next quarter there will be a benefit of a low base which can make the earnings look better; Above normal monsoon so far; Upcoming festive season which can boost consumption; The much awaited India-UK FTA was signed eliminating tariffs on about 99% goods – this will give a great boost to the bilateral trade between the two nations. Owing to a low inflation number – the RBI Governor has also hinted at a rate cut in the upcoming MPC meet in August, which can provide an interim boost to the markets in such a volatile situation.

With all the bad news discounted by the markets, the possibility of a further down move looks slim with 24,500 levels acting as a hard support.

India and the USA are expected to return to the negotiating table in the second half of August to strike a deal – till then, 25% tariffs is the new reality. News of a deal between India and the USA can act as a catalyst to reignite the bulls, but this is a game of patience, so let’s wait and watch!

www.pinnaclefinvest.com

mohit@pinnaclefinvest.com

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