Windmill Capital Investor Letter – April 2025 Edition

Welcome to your monthly Windmill Investor Letter. Here’s a roundup of key developments, performance highlights, and curated reads from April 2025, all in one place.

Tariff Turmoil & India’s Tightrope: Navigating a New Global Trade Order

Since the start of 2025, Indian equity markets have seen a fair share of volatility. The Tariff tantrum began in January when Trump took office, and along the way, this tariff saga has gone through multiple iterations. The markets have consumed every piece of news from the White House with much anticipation and as you might have guessed, some were positive for India while somewhere negative. 

While the broader market trajectory has been downwards, surprisingly over the last 10 days, there’s a fresh bout of strong buying that the Indian markets have witnessed. Take a look at the returns of the Nifty 50 from the start of the year up until Apr 7. And then from Apr 7 to date. 100 days of losses recovered within 15 days. 

Pre & Post Tariff Announcement India

Well, it’s difficult for one to ascribe a particular reason for this up-move, however, a calculated guess could be the way India is placed in this tariff punishment as compared to the rest of the world. We are in a much better position, as far as tariffs are concerned, in comparison to many other emerging and developed economies. Let’s start from the beginning, shall we? 

International Trade policies, Trade deficits, Tariffs, and they have become central topics in recent economic and political discourse. With nations like the United States maintaining significant trade deficits, especially with countries like China, the economic effects and political responses, particularly tariffs, have come under scrutiny.

What’s International Trade? 

When two countries trade with each other, they do so by importing (buying) and exporting (selling) goods and services.

What’s Trade Deficit? 

When a country imports (buys) more goods than it exports to a particular country, it is said to have a trade deficit.

What’s a Tariff? 

A tax imposed by a government on imported goods and, occasionally, on exported goods. Tariffs are typically used to make foreign products more expensive, giving an advantage to domestic industries by making local products relatively cheaper and more competitive.

The strong tariff push from Trump’s end, has been coming through with the intention to protect local American industries. It all began on Apr 3, when Trump announced a sweeping set of tariffs under the banner of the “Liberation Day” trade policy, marking a significant shift in the country’s approach to global trade. Effective April 5, a blanket 10% tariff was imposed on all imports into the United States. In addition, countries with large trade surpluses with the U.S. faced steeper tariffs. China, for example, was levied with a cumulative tariff rate of 54%, including a newly added 34% duty on top of existing levies. India got impacted, with a 26% tariff now applied to its exports to the U.S. Other countries affected include Vietnam, Cambodia, Sri Lanka, Taiwan, and the European Union, with tariffs ranging from 20% to 49%. 

India happens to be one of the largest trade partners with the US, with bilateral trade reaching $129 bn in CY24. India exported $87.4 bn worth of goods to the U.S. and imported $41.8 bn, resulting in a trade surplus of $45.7 bn — up from $23.7 bn in CY15. 

India’s key exports to the U.S. include electrical machinery, gems & jewellery, pharmaceutical products, nuclear reactor machinery and refined petroleum. On the other hand, India mainly imports energy commodities such as crude oil, natural gas, and coal from the U.S., along with pearls and precious stones, machinery, electronics, and aircraft components.

Now, as far as India is concerned, our economy is closely tied to global trade. Between 2008 and 2019, every 1% rise or fall in global trade growth affected India’s GDP growth by nearly 1.8%. For example, during the U.S.-China tariff war in 2019, India’s growth dropped to 3.5% from an earlier 6.8%.

Therefore, it’s essential to understand how these tariffs are going to impact different sectors of the economy. Let’s take a look. 

*Tariff Differential refers to the tariff rate difference between India and the US

For India, the newly imposed 26% tariff marks a substantial increase from the previous weighted average of 12%, effectively raising the average tariff rate by more than 2 times. While this rate is lower than that imposed on some other emerging Asian economies, it still presents significant challenges for Indian exporters. While negotiations are underway, only time will tell how far we can be better placed than competitors.

The Gold Rush of a Fragmenting World

Gold prices have surged sharply in 2025, breaking past the magical ₹1 lakh mark (for 10 grams) in terms of landed price and approaching all-time highs. While the usual drivers—rate expectations, central bank buying, and geopolitical risks—remain relevant, a key yet underappreciated catalyst this year is the intensifying global tariff environment, especially as the U.S. adopts a more protectionist stance.

This renewed wave of tariffs is creating broad-based uncertainty across global trade, commodities, and currency markets, prompting investors and central banks alike to seek the safety of gold.

1. Rising Tariff Walls Are Reigniting Risk-Off Sentiment

The U.S. has implemented or proposed significant tariff hikes, targeting Chinese goods, strategic technologies, EVs, pharmaceuticals, and even traditional sectors like steel and textiles. India, too, is caught in this widening net of tariff realignment. 

For corporates and investors, the message is clear: the world is fragmenting into trade blocs, and the predictability of global commerce is diminishing. In this environment, gold, being outside the fiat, trade, and regulatory system, is an increasingly attractive hedge.

2. Currency Volatility and Inflation Pass-Through from Tariffs

Tariff hikes act as a tax on trade, increasing the landed cost of goods. In many countries, this is being passed through to consumers as imported inflation. Meanwhile, countries with weaker currencies or high import dependence (like India, Indonesia, and parts of Africa) are seeing currency depreciation, which makes gold an even more compelling asset to preserve purchasing power.

The interplay of:

• Rising costs of imports,
• Stretched fiscal deficits (as governments offer subsidies to shield domestic industries), and
• Higher trade imbalances

is putting pressure on fiat currencies. In contrast, gold’s value rises in direct proportion to these stresses, making it a preferred asset class during tariff-induced turbulence.

3. Central Banks Hedge Against Trade and Dollar Risk

Central banks are acutely aware of the growing weaponisation of trade and the dollar. In response, they’ve ramped up non-dollar reserve diversification, particularly into gold.

In 2024 and continuing into 2025, central banks collectively added 1,200+ tonnes of gold, with China, Turkey, and India leading the buying spree. This is a structural move, not merely a reaction to inflation or rates, but a strategic hedge against growing Western trade protectionism, secondary sanctions, and geopolitical leverage linked to currencies and trade access. This long-term demand base gives the current gold rally durability and depth, distinct from previous, more sentiment-driven rallies.

4. Gold Is Outperforming Other Safe-Havens Amid Trade Fragmentation

Traditionally, the dollar and U.S. Treasuries serve as global safe havens. However, in an environment where the U.S. is at the epicentre of trade tensions, its safe-haven status is being reassessed by global investors. Investors are rotating into neutral assets like gold, which are not tied to the credit risk, trade policy, or inflationary decisions of any single government.

5. Forward-Looking: The Case for Structural Allocation to Gold

Looking ahead, even if tariffs are dialled back or politically negotiated, the broader environment has shifted. Supply chains are more regionalised, trade is less frictionless, and currency volatility is here to stay.

In this world, gold plays multiple roles:

• A hedge against trade volatility and inflation

• A buffer against currency depreciation

• An apolitical reserve asset for central banks and sovereigns

As tariffs rise and global economic integration reverses, gold is no longer just a crisis hedge—it is becoming a core allocation in a deglobalising world. The gold rally of 2025 is not just about dovish Fed signals or central bank demand—it is deeply linked to the tectonic shifts in the global trade and tariff regime. As the world edges toward economic nationalism and strategic decoupling, gold offers stability in a system increasingly characterised by fragmentation, uncertainty, and inflationary frictions. The new gold thesis isn’t just about rates—it’s about resilience. Numbers don’t lie.

The World Dances to the Tune of US Bonds: What Recent Yield Moves Mean for India

Well, there’s a lot happening in the financial world. And amidst that, the big movement in US 10Yr bond yields have quite literally shaken up the world. Think of the US 10Yr as the world’s benchmark “risk-free” interest rate. It’s the rate at which the world’s largest economy borrows money, and its movements send ripples across the globe, influencing everything from currencies to stock markets.

Lately, these yields have been on a bit of a rollercoaster ride, causing considerable buzz and even some anxiety among investors worldwide. Let’s decode what’s happening and, more importantly, why it matters to the US, India, the world, and your own investment portfolio.

Decoding the Wiggles: What’s Happening with US Bond Yields?

First, a quick refresher: Bond prices and yields have an inverse relationship. When demand for bonds goes up, their prices rise, and consequently, their yields (the effective return you get) fall. Conversely, when investors sell bonds, prices drop, and yields climb.

Recently, specifically in early May 2025, the US 10-year Treasury yield has been hovering around the 4.3% to 4.35% mark. This might not sound dramatic in isolation, but it follows a period of significant volatility. We saw yields jump quite sharply, even briefly crossing 4.5% in April 2025, but also periods earlier in the year where yields trended lower.

So, what’s causing these swings? It’s a mix of factors:

1. Global Trade and Geopolitical Tensions:
   
   Uncertainty around global trade—especially U.S. tariff policies—has made markets nervous. The dialogue regarding tariffs have sparked inflation fears and increased market volatility. This sometimes causes investors to sell off even safe-haven assets like U.S. Treasuries, pushing bond yields higher, which is what we’ve seen lately.
2. The US Fed’s Delicate Balancing Act:
   
   The U.S. Federal Reserve (Fed) raised interest rates sharply in recent years to control inflation. They started cutting rates slowly in late 2024, but they’re being cautious. The market expects more rate cuts in 2025, but strong economic data—like solid job numbers—is making the Fed hesitant. A strong economy could delay further rate cuts, which keeps bond yields high.
3. Mixed Economic Signals:
   
   Is the U.S. economy heading for a smooth slowdown or a rough patch? April 2025 job data showed strong hiring, easing recession fears and pushing yields up. Inflation has come down from its highs, but it’s still not near the Fed’s 2% target. As long as inflation remains sticky, bond yields may stay high since investors want better returns to make up for rising prices.

The American Impact: Ripples in the US Economy

These yield movements aren’t just numbers on a screen; they directly impact the US economy:

Borrowing Costs: Higher yields mean higher borrowing costs for everyone. The US government pays more interest on its massive debt. Businesses find it more expensive to borrow for expansion or operations or service existing debt. For context, US national debt has doubled from $18.15 trillion in 2015 to $36.22 trillion in 2025.

Consumer Loans: Crucially, consumer loan rates, especially mortgages, are closely tied to Treasury yields. The 30-year fixed mortgage rate hovering near 6.7-6.8% makes home buying more expensive, potentially cooling the housing market. Car loans and credit card rates also tend to follow suit. Over the last 1 year, on a percentage basis, total consumer credit in the United States have come down, as indicated by the chart and more sharply since the start of the year.

• Investment & Growth: When borrowing is expensive, businesses might postpone investments, which can slow down overall economic growth.

Across the Oceans: Why India Feels the Tremors

Why should we in India care so much about US interest rates? Because global finance is deeply interconnected.

1. Foreign Portfolio Investment (FPI) Flows: Global investors constantly seek the best returns. When US yields rise significantly, parking money in “safe” US Treasuries becomes more attractive compared to investing in emerging markets like India. This can lead to FPIs pulling money out of Indian stock and bond markets.
2. The Rupee’s Dance (USD/INR): US yields heavily influence the US Dollar (USD). Higher US yields generally strengthen the USD as global investors buy dollars to invest in US assets. A stronger USD means a weaker Indian Rupee (INR), making our imports (especially crucial ones like crude oil) more expensive and potentially fueling domestic inflation. A weaker USD (often resulting from falling US yields) can strengthen the Rupee, making imports cheaper and providing relief.
3. RBI’s Tightrope Walk: The Reserve Bank of India (RBI) has to factor in the Fed’s actions when setting its own monetary policy. If the Fed is hiking rates aggressively, the RBI might be hesitant to cut rates sharply, even if domestic conditions warrant it, fearing capital outflows and pressure on the Rupee. Interestingly, the gap (spread) between Indian and US 10-year bond yields recently narrowed significantly, even dipping below 2% briefly in April 2025 – a historic low. This narrowing spread actually gives the RBI more independence to set interest rates based on India’s needs (like the recent repo rate cut to 6% in April 2025) without excessively worrying about the Rupee’s exchange rate.

Global Echoes: The World Listens When US Bonds Speak

The impact extends beyond India. US Treasury yields serve as a global benchmark. Rising US yields increase borrowing costs for governments and corporations worldwide, especially in emerging economies that borrow in USD. They influence the policy decisions of other major central banks and can dictate the flow of capital across the globe, impacting global growth prospects.

Market Mayhem or Opportunity? Impact on Your Investments

For retail investors in India, these global shifts translate into tangible effects on portfolios:

• Stock Markets & Fixed Income: Higher interest rates generally make fixed-income investments (like bonds or FDs) relatively more attractive compared to equities. They also increase borrowing costs for companies, potentially hurting profits and stock valuations, especially for growth-oriented companies.
• Gold: Gold often acts as a safe haven during uncertainty. As we have witnessed also, with gold surging in price, on account of the current uncertain environment.

Navigating the Waves: What Should an Indian Retail Investor Do?

Seeing these global connections can feel overwhelming, but the principles of sound investing remain your anchor:

1. Don’t Panic, Think Long-Term: Market volatility is normal. Avoid knee-jerk reactions based on daily news. Focus on your long-term financial goals.
2. Diversification is Your Shield: Spread your investments across different asset classes – equities, debt, gold, and maybe even some international exposure. This helps cushion the impact if one asset class underperforms.
3. Stick to Disciplined Investing: Continue your Systematic Investment Plans (SIPs) regardless of market noise. 

The Final Word on the US Bonds Movements

The movements in US bond yields are a powerful reminder of how interconnected our global economy is. They influence capital flows, currency values, central bank policies, and ultimately, our investment portfolios here in India. While it’s crucial to understand these dynamics, the wisest course for most retail investors is not to try and time the market based on these complex global shifts, but to stick to a well-diversified, long-term investment strategy tailored to your individual financial goals. The world may dance to the tune of US bonds, but your financial future should be choreographed by discipline and patience.

Logic Behind the Latest Rebalance of Our Quant smallcases

Every rebalance cycle, we apply our quantamental models to assess which stocks stay, enter, or exit, based on underlying model factors like growth, quality, momentum, and trend strength. Here’s a breakdown of what changed this cycle and why.

Growth Multicap – Quant

High-growth multi-cap stocks with strong price trends
Launch Date: March 7, 2025
Rebalance Date: May 2, 2025

These stocks have been added to the smallcase as they meet our model criteria, including high growth, fundamental soundness, and relative strength.

These stocks were not satisfying model criteria specific to momentum, relative strength, or consistency in growth. Hence, they were excluded from the smallcase.

Quality Bluechips – Quant

High-quality bluechip stocks with strong price trends
Launch Date: February 21, 2025
Rebalance Date: May 2, 2025

This stock satisfies the model criteria linked with quality and price trend. Hence, it is getting added in the smallcase.

As insufficient stocks meet the defined criteria, our risk management framework allows us to include gold ETF to preserve capital until favorable conditions return.

These stocks are not satisfying the criteria specific to the quality of the trend. Hence, it is being excluded from the smallcase.

Quality Smallcap – Quant

Quality smallcap stocks with positive momentum trends
Launch Date: December 02, 2020
Rebalance Date: May 2, 2025

As insufficient stocks meet the defined criteria, our risk management framework allows us to include gold ETF to preserve capital until favorable conditions return.

This stock is not satisfying the criteria specific to the quality of the trend. Hence, it is being excluded from the smallcase.

🧠 Why This Matters

Each rebalance reflects a disciplined approach backed by our proprietary quantamental models. If a stock no longer meets our model criteria, it’s removed. If fewer stocks pass the model criteria, we increase gold exposure until favourable conditions return. This systematic, bias-free approach helps investors stay aligned with long-term strategy and manage risk efficiently.

🌀 Windmill Wisdom

From market moves to money moods, the latest from our desk.

🔎 In Focus This Month:

D2C: Direct to (Your) Portfolio?
What India’s consumer brand boom means for long-term investors.
Read more →

Adding a Safety Net to Growth
Why we added ETFs to the GEM-Q Model (previously known as CANSLIM-esque) smallcase.
Read more →

Disclaimer: Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of a SEBI recognized supervisory body (if any) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

The content in these posts/articles is for informational and educational purposes only and should not be construed as professional financial advice and nor to be construed as an offer to buy /sell or the solicitation of an offer to buy/sell any security or financial products.Users must make their own investment decisions based on their specific investment objective and financial position and using such independent advisors as they believe necessary. Windmill Capital Team: Windmill Capital Private Limited is a SEBI registered research analyst (Regn. No. INH200007645) based in Bengaluru at No 51 Le Parc Richmonde, Richmond Road, Shanthala Nagar, Bangalore, Karnataka – 560025 creating Thematic & Quantamental curated stock/ETF portfolios. Data analysis is the heart and soul behind our portfolio construction & with 50+ offerings, we have something for everyone. CIN of the company is U74999KA2020PTC132398. For more information and disclosures, visit our disclosures page here.