'Market slowdown will become painful if...': Saurabh Mukherjea warns Trump's policies could deepen the fall

India’s stock market is going through a cyclical slowdown, but global factors, especially Trump’s economic policies, could turn it into a far more painful downturn, warns Saurabh Mukherjea, founder of Marcellus Investment Managers. "We had three very good years in India. Post-COVID, FY22, FY23, and FY24 were sparkling years. And if you look at India's history, it is very rare for the market to keep running for four consecutive years. Usually, by the fourth year, we experience a cyclical slowdown because our supply-side factors — labor markets, capital markets, and land markets — lack the capacity to sustain rapid growth for four straight years. There is some weakness," Mukherjea said in a podcast with Raj Shamani.

He pointed out that banks are experiencing liquidity issues, which is impacting loan growth. "As you’ve probably been hearing, banks don’t have excess funds right now. Deposit growth is slow, and as a result, loan growth has also slowed down. This is a classic sign of a supply-side weakness. People have taken money out of their savings accounts and poured it into the stock market, causing stocks to soar, but at the same time, liquidity in the banking system has shrunk," he explained.

Mukherjea explained that India has historically experienced two types of slowdowns. The benign (less painful) slowdown – Similar to 2016, when the market grew for two-three years, then took a breather and resumed growth within a year. The painful slowdown – like what happened in 2012-13.

"When the dollar strengthens, the RBI has to tighten liquidity by sucking rupees out of the system. Ideally, when the economy weakens, the RBI should cut interest rates, but to protect the rupee, it has to raise interest rates instead. This creates a painful scenario, as seen in 2012-13," Mukherjea said.

Mukherjea warned that Donald Trump’s economic policies could further strengthen the dollar, pushing India's stock market toward a more painful slowdown. "My fear is that Trump's actions could further strengthen the dollar. If he keeps strengthening dollar by putting tariffs on other countries, then it will become a far more painful slowdown," he said.

Mukherjea’s concerns come at a time when the BSE Sensex has fallen 13% since October 2024, and mid- and small-cap indices have crashed 22% and 25%, respectively. 

Jimeet Modi, Founder & Director of Samco AMC, recently warned that the five-year bull market may take much longer to unwind. "Lots of excesses have been created even after the correction. Nifty Midcap 150 and Smallcap 250 still have some froth. Five years of a bull market may not unwind in five months. However, some market watchers believe that the market is already in the process of forming the bottom," Modi said.

Mukherjea remains hopeful that the slowdown will be similar to 2016, where markets slow down for a few quarters before rebounding. But he cautioned that Trump’s economic policies could turn it into a 2012-13 style painful correction. "I hope it turns out to be like 2016 — a three to four-quarter slowdown followed by recovery. But if Trump raises tariffs and pushes the dollar up, then there will be a challenge," Mukherjea said.