India pivots to China with Modi-Xi talks, tax cuts to defy US tariffs.

Amidst a backdrop of underperforming domestic equities and significant capital outflows, India is strategically recalibrating its economic and diplomatic posture. A pivotal meeting between Prime Minister Narendra Modi and Chinese President Xi Jinping on August 31 in Tianjin signals a potential realignment, interpreted by market observers as a calculated move to both invigorate the Indian economy and navigate an increasingly protectionist global trade environment, particularly in light of reciprocal tariffs imposed by the United States. This diplomatic overture, coupled with aggressive domestic monetary and fiscal stimulus, presents a complex new calculus for international investors.

The high-level talks, as reported by Bloomberg, centered on long-standing border disputes, the resumption of direct air links, and the expansion of bilateral trade. For market watchers, this engagement transcends mere diplomatic courtesy; it is perceived as a strategic pivot by India in response to the 50% reciprocal tariffs enforced by the United States under President Donald Trump. This warming of relations with Beijing, alongside internal economic measures, is being interpreted by some analysts as a concerted effort to mitigate the adverse effects of Trump’s assertive trade stance on India’s economic growth and market sentiment.

The urgency for such strategic maneuvers is underscored by recent economic indicators. India’s Nifty 50 index has seen a modest rise of 4.6% year-to-date, sharply contrasting with the 19% surge in the MSCI Emerging Markets Index. Furthermore, global investors have withdrawn a substantial $16 billion from Indian equities this year. The significant trade imbalance between India and China—where India exported only $14.2 billion but imported $113.5 billion in the fiscal year ending March 2025—suggests that India stands to gain considerably more from any improvements in trade flows, particularly in sectors like manufacturing, energy technology, and capital inflows.

This potential reorientation has drawn varied expert opinions. Jasmine Duan, Senior Investment Strategist at RBC Wealth Management in Hong Kong, suggests that “improved Sino-Indian relations may benefit the Indian stock market more significantly, as India is currently the one facing the 50% tariff hike.” She anticipates a more indirect and marginal impact on Chinese stocks. However, skepticism persists among some fund managers. Kunjal Gala, who oversees $2.3 billion at Federated Hermes in London, cautions that “it’s too early to tell which sectors or industries will benefit, as no concrete policies have been announced,” warning that market effects could be transient without tangible trade reforms. Conversely, Pramod Gubbi, co-founder at Marcellus Investment Managers in Mumbai, posits that the recent decline in India’s allocation within EM portfolios could be arrested or even reversed, believing that tariff impacts may be offset by an anticipated boost to Indian economic growth and subsequent earnings recovery.

Complementing the diplomatic shifts are robust domestic economic policies aimed at bolstering investor confidence and stimulating growth. Sanjay Malhotra, Governor of the Reserve Bank of India, has confirmed the central bank’s ongoing rate-cutting cycle, with the benchmark rate having been lowered by 100 basis points since February to invigorate sectors affected by tariffs and slowing demand. Concurrently, a joint panel of state and federal finance ministers approved significant cuts to the goods and services tax (GST) across nearly 400 product categories, which collectively account for approximately 16% of India’s consumer-price basket. This fiscal measure has already seen shares in consumer-facing companies and automotive manufacturers respond positively.

Analysts like Anna Wu, a Cross-Asset Strategist at VanEck Associates in Sydney, view these developments as interconnected tailwinds. She notes that “the warming of China-India ties can be a positive factor, while the tax cuts are also a structural tailwind for Indian equities.” Wu further suggests that India could strengthen its resilience against U.S. tariff aggression by forming a new economic axis with China and Russia. This emerging bloc, as she describes it, offers India a strategic avenue to enhance its economic stability in an increasingly complex and protectionist global trade landscape.