Stocks slumped 1% on Tuesday after the US slapped an extra 25% tariff on nearly all Indian goods, raising overall duties to as much as 50%—among the highest Washington has imposed on any trading partner. The market remained closed on Wednesday for Ganesh Chaturthi, making Thursday the opening day for investors in the punitive tariff regime.

Adding to the pressure is the monthly futures and options expiry, which typically falls on the last Thursday of the month. As traders roll over their positions to the next month’s series, the pace and cost of these rollovers offer a window into market sentiment. A falling rollover cost, as seen on Tuesday, signals weakening bulls and strengthening bears.

The rollover cost fell from around 58 basis points or (0.57-0.58%) on Monday to 52 basis points on Tuesday, indicating a greater sway of bears over bulls, said Sriram Velayudhan, senior vice-president at wealth management firm IIFL Capital Services Ltd.

“A confluence of factors like geopolitical tariff tensions, the MSCI quarterly review and expiry-related rollovers (roll levels came under pressure) contributed to the bearish sentiments,” he said.

The MSCI index rebalancing that took effect on Tuesday is expected to trigger a net $300 million outflow from India, Nuvama Alternative and Quantitative Research said on 25 August. Swiggy, Vishal Mega Mart, Hitachi Energy India and Waaree Energies will enter the MSCI Standard index, while Sona Comstar and Thermax will exit.

Velayudhan expects the market’s sentiment to be clearer by Thursday’s close. A higher count of rollovers would indicate that short-sellers are carrying their bearish bets forward, while a lower rollover count could signal they are pausing, suggesting a more positive outlook after Tuesday’s fall.

Meanwhile, US treasury secretary Scott Bessent noted that despite a good relationship between the two nations’ leaders, key issues remain unresolved, calling the India-US relationship as “very complicated,”. These include disagreements over India’s continued purchase of Russian oil, which has led to new tariffs, and stalled trade negotiations. Bessent expressed hope that the two countries “will come together” in the end, but highlighted the US’s advantageous position as the deficit country in trade relations.

Rohit Srivastava, founder of analytics firm IndiaCharts, expects the Nifty to test crucial levels at 24,350—and possibly even 23,847—in the next derivatives series, based on daily and weekly charts. On Tuesday, the Nifty had closed at 24,712.05.

“The knock-off impact of the US tariffs on different sectors has queered the pitch for the markets,” he said.

Derivatives contracts are used by both investors and traders. While investors use them to hedge or insure their portfolios against uncertainty, traders use them to speculate, taking on the risk that investors transfer.

“If an investor sees a rise in uncertainty, say due to the tariffs, they would short index futures or stocks or buy puts, while a speculator will take a contrary position to theirs,” explained Rajesh Palviya, head of research, brokerage Axis Securities Ltd. He expects the Nifty to test 24,500 on Thursday.

“The festive season has begun, but markets might have to wait longer before celebrations begin,” he added.

The waiting game

Investors are in a wait-and-watch mode, hoping India can negotiate its way out of the new levies.

“Tariffs are here to stay, with the key question being their absolute level and how they compare globally; the current 50%+ tariff is more a negotiation stance than a final rate,” said Riddhiman Jain, managing director, head of investment strategy and solutions, financial adviser Waterfield Advisors Pvt. Ltd.

Until there’s clarity, stocks could see sharp swings, though without major corrections.

BofA Securities India Ltd has maintained its Nifty 50 year-end target at 25,000. However, in its 12 August report, the equity research and brokerage firm said it expects the index to swing between -11% and +4% (bull/bear case) as investors react to developments around trade tariffs, US economic outlook, interest rate cuts in the US and India, and any policy or fiscal support to cushion the tariff impact.

The Nifty 50 began 2025 at around 23,700 and is now hovering near 24,700, after swinging between a low of 21,743.65 and a high of 25,669.

“Our base case is for India to attract 15% tariffs from the US eventually, in line with the market reaction currently. However, developing news around this issue could keep markets volatile and act as a downside risk if higher tariffs at 25-50% persist,” the report said.

Beyond trade, experts see signs of consolidation in Indian equities driven by high valuations, modest earnings growth, tariff worries, slow government and corporate capital expenditures, and foreign investor profit-taking.

Weak earnings factored in

Market researcher Nuvama Institutional Equities observed in a report earlier this month that profits of BSE-500 companies have largely aligned with weak revenue growth, with cooling profits across sectors. The brokerage cautioned that earnings growth in 2025-26 looks challenging amid an uncertain demand outlook driven by a narrowing US trade deficit, corporate capex cuts, weak household incomes, and fiscal consolidation—combined with elevated margins that leave little scope for further cost efficiencies.

“The flattening of one-year forward earnings per share (EPS), alongside still-high valuations, could cap the upside despite strong domestic flows,” it warned.

Meanwhile, steady domestic flows continue to provide a much-needed cushion. While foreign institutional investors (FIIs) turned sellers in July, offloading ₹24,723.48 crore, after four straight months of inflows, domestic institutional investors (DIIs) have remained steady buyers, pumping ₹60,938.56 crore.

“Markets have discounted muted earnings for the next couple of quarters, and we expect earnings to rebound after the second half of 2025-26,” said Nimish Shah, managing director of family office and portfolio analytics at wealth manager LGT Wealth India, who expects range-bound trade until signs of economic revival emerge.

Consumption revival hopes

On the policy side, the anticipated goods and services tax (GST) reforms ahead of the festive season will likely help companies post better results by boosting consumption. In his Independence Day address, Prime Minister Narendra Modi said GST reforms, promising lower taxes, will be rolled out before Diwali.

Jain of Waterfield Advisors expects the reforms to ease inflation by 20-60 basis points and lift consumption, benefiting sectors like automobiles, fast-moving consumer goods, and insurance. However, he said electric vehicles could lose some of their price edge.

“This creates positive market sentiment ahead,” he said.

The indirect tax reforms—and potential further rate cuts—could serve as key catalysts for the market.

Eyes on global headwinds

Besides, global cues will remain critical.

The US Fed’s commentary on rates directly drives global liquidity and foreign flows—dovish signals tend to draw capital into India, while hawkish tones trigger outflows and volatility. Concerns about Fed independence have already resurfaced after Trump announced the removal of governor Lisa Cook.

China’s economic data also influences investor sentiment and commodity prices: Weak prints often lower India’s import bill but stoke caution, while stronger numbers improve trade flows across the region and shift investor preference between China and India.

Still, tariff-related risks loom large.

“Amid higher tariffs, India’s products might lose competitiveness, potentially benefiting countries like China and Vietnam,” said a 26 August note by SBI Research. It noted that the tariffs imposed on India are steeper than those on several Asian peers—China (30%), Vietnam (20%), Indonesia (19%), and Japan (15%).