Modi and Xi in tricky tango as tariff deadline looms

The tariff clock is ticking loudly for India, with an additional 25% levy on shipments to the U.S. set to kick in on August 27. Since U.S. President Donald Trump threatened the additional tariffs, India has focused on mending ties with China while making no public overtures towards the U.S.

But markets are taking the impending blow in their stride. Is that optimism warranted? That's our focus this week.

And India bans real-money online games, threatening the survival of the gaming sector. Scroll down for more on that.

Days away from being hit with punitive tariffs on its U.S. exports, India's diplomatic manoeuvres have focused on putting in place hedges against its currently fractious relationship with Washington.

On Monday, the U.S. notified rules for the higher 50% tariff to begin on August 27, signalling the Trump administration is serious about increasing trade pressure on India.

Since Trump threatened India with tariffs that are among the highest across America's trading partners, New Delhi's focus has been on mending ties with neighbouring China while signalling the country's continued closeness with long-time friend Russia.

Indian Prime Minister Narendra Modi has confirmed his visit to China at the weekend for the Shanghai Cooperation Organisation (SCO) summit, which will host leaders of more than 20 countries, including Russia's Vladimir Putin.

Ahead of that, India and China agreed to restart direct flights, stopped after the border clashes of 2020. Thorny trade issues including Chinese supply of rare earths, fertilisers and tunnel boring machines, are being addressed.

China opposes Washington's steep tariffs on India and will "firmly stand with India", Chinese ambassador to India Xu Feihong said last week.  

Read here for more on the cautious attempts by India and China to repair relations.

There are reasons to doubt the likelihood of a significant improvement in Sino-Indian relations, including the risk that these overtures could worsen India's tensions with the U.S., Shilan Shah, deputy chief emerging market economist at Capital Economics, wrote in a note.

Capital Economics sees India's overtures to China as an attempt to build a geopolitical hedge but sees limits to an improvement in the relationship.

"There are several strains within the India-China relationship that would be hard to overcome," Shah wrote.

"An influx of cheap Chinese imports is undermining India's efforts to strengthen its domestic industry. And the biggest constraint on stronger relations is the view within India that China poses a threat to national security," he wrote.

A new Chinese mega dam is among the latest points of friction. Read this exclusive report on why the dam is sparking fears of a water war.

Alongside, India has continued to demonstrate its closeness to Russia, with foreign minister S. Jaishankar's visit to Moscow last week.

Relations between the two countries have been among the steadiest of major relationships after World War Two, Jaishankar said, as India continued to buy Russian oil despite the looming threat of U.S. tariffs of up to 50%.

Read here for more on the outcome of the India-Russia talks.

Indian markets, meanwhile, are taking things rather calmly.

The benchmark Nifty 50 index has been flat over the past month since the threats of a penal tariff rate on India emerged, while the Indian rupee has fallen only about 1%.

Firms which are part of the Nifty index earn only 9% of their revenue from the U.S. And the Indian central bank has $695 billion in foreign currency reserves and intervenes actively in the forex markets to limit any sharp falls in the currency.

Fitch retained India's sovereign rating on Monday, citing just a moderate risk from higher U.S. tariffs to its GDP growth forecast of 6.5% for the Indian economy in the current year.

Modi's government is speeding up efforts to boost the local economy and counter some of that hit.

The tax reforms announced earlier this month will be put to vote at a tax council meeting in New Delhi as early as next week and are likely to go through with no significant public opposition to the proposals so far.

An "arsenal of reform" is coming, Modi said, speaking at an event hosted by Indian newspaper Economic Times over the weekend.
    
Is the Indian market underpricing the impact of higher trade tariffs? Write to me at ira.dugal@thomsonreuters.com.

India's parliament has approved banning of online games played with money, arguing their proliferation and popularity are leading to psychological and financial harm to the players, particularly younger and lower-income individuals and families.

The unexpected ban has hit an industry backed by venture capital firms such as Tiger Global and Peak XV Partners, and put a sponsorship deal for India's cricket team at risk.

Indian companies have seen the steepest earnings downgrades in Asia, adding pressure to the country's already underperforming equity indices which have been weighed down by weaker profit growth, high valuations and uncertainty over tariffs.

Forward 12-month earnings estimates for India's large and mid-cap firms have been cut by 1.2% in the past two weeks, LSEG data shows.

Read more here.

India has shared a warning on possible cross-border flooding with neighbour Pakistan as both countries grapple with deadly floods and relentless monsoon rains.

Massive, sudden downpours of rain known as cloudbursts have struck Pakistan and India during this monsoon season, killing hundreds of people in the flash floods and landslides they have triggered.

This newsletter was edited by Muralikumar Anantharaman, Editor, Global News Desk in Singapore.

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