Raghuram Rajan sees market rebound ahead: 'Stocks will grow once US tariff deal is done'

Former RBI Governor Raghuram Rajan believes India's stock market will strengthen once a trade deal with the US is finalised. He said there is no reason for tariffs to remain as high as they currently are and argued they should fall to under 20%. "There's been more downward pressure in the Indian market, more upward pressure in the US market," Rajan told CA Kushal Lodha. "A lot of the difference seems to be about AI and how it will be utilised."

The economist said that whenever a new technology emerges, there is always a phase of euphoria, "which tends to be disappointed at first if you look at the pattern, and then eventually it happens." He cited the example of internet stocks. "Amazon used to be thought of very highly in the dotcom boom and then collapsed, and if we'd all bought Amazon then, we'd be very rich now. But Amazon came back up and is now floating high because of AI. Amazon's cloud services are doing well."

"So, the bottom line is that the euphoria has shifted to the US from India," he said while responding to a question comparing Indian and US stock market valuations. "There was a time when everybody was euphoric about India. Now with the tariffs and so on, there may be more pessimism about India."

Rajan suggested that the Indian market, which has largely been flat over the past year, would regain momentum once the trade talks are concluded. "So, I would say that with the hope that these tariff negotiations with the US are resolved. There's no reason why India should be tariffed more than every other country in the world. And if we bring it back to levels which are similar to our competitors -between 10% and 20% - the hope for India's growth will again improve."

He added that India was growing reasonably well, but there was this cloud on India's growth from the tariffs. "So, the hopes of foreign investors will improve and the anticipation and ambition for India will improve, and India will do better when that happens."

When asked whether the stock market will perform better in the long term, Rajan said: "I think so. It's always hard to tell because if the current level is too high, the future level the change will not be that high. But, if India develops as promised, there's no reason why India's stock market should hold back. There will be periods of overvaluation, periods of undervaluation, but if you stay for the long run, there's no reason why you won't be getting adequate returns."