The tide turns: India-US trade deal breaks the gloom

Summary: After months of selling pressure and policy overhangs, a sudden US-India trade deal has flipped market sentiment overnight. And investors are asking the same question again: Does this change the case for Indian equities, and who really benefits if it does?

Just when Indian markets seemed trapped, battered by foreign outflows, rattled by the STT (Securities Transaction Tax) hike in the Union Budget 2026, and weighed down by tariff uncertainty, a single phone call has changed the narrative overnight.

On February 2, US President Donald Trump announced a trade deal with India following a conversation with Prime Minister Narendra Modi. The effective tariff on Indian goods drops from 50 per cent to 18 per cent, effective immediately. Gift Nifty surged over 800 points, or roughly 3 per cent, in early trading.

For investors who have endured months of uncertainty, this is worth understanding clearly.

What the deal delivers

The US has reduced the combined tariff on Indian goods from 50 per cent (a 25 per cent ‘reciprocal’ tariff plus a 25 per cent Russian oil penalty) to a flat 18 per cent. This puts India ahead of Vietnam and Bangladesh (20 per cent each) and Pakistan (19 per cent).

In exchange, India has reportedly committed to reducing tariffs on US goods to zero, purchasing over $500 billion worth of American energy, technology, and agricultural products, and halting Russian oil purchases.

PM Modi’s response was measured, welcoming the tariff cut without elaborating on India’s commitments. Formal documentation is pending, and some analysts have called the terms “vague.” But for markets, the direction matters more than the fine print right now.

Why the timing is perfect

Indian equities have been under siege. The Sensex crashed over 1,500 points on February 1 after the Budget’s STT hike. Foreign Portfolio Investors made India the worst-performing major emerging market in 2025, with record outflows.

This deal addresses a key structural overhang. At 18 per cent, Indian exports become meaningfully competitive. The punitive tariff regime that had deterred foreign capital is gone.

Coming days after India signed the ‘mother of all deals’ with the European Union—covering 96 per cent of traded goods—the US agreement reinforces a powerful narrative: India is successfully navigating a fractured global trade environment while others flounder.

Can this bring FIIs back?

Foreign investors have been selling for good reasons: stretched valuations, earnings downgrades, rupee weakness, and tariff uncertainty. The deal directly tackles the last factor. Here’s why it could reverse the exodus:

• Earnings visibility improves. IT services, pharmaceuticals, auto components, textiles, and chemicals—India’s major US exports—gain immediate competitiveness. Lower tariffs mean better margins and stronger order flows.
• Currency pressure eases. A constructive US relationship, combined with the EU deal, strengthens India’s export diversification story. This supports the current account and the rupee.
• Risk perception shifts. Much FII selling reflected a ‘wait and watch’ stance given Washington’s unpredictability. This deal signals that India and the US can find common ground, reducing tail risk for foreign portfolios.
• Relative value returns. With tariffs now comparable to other Asian economies, India’s structural advantages—demographics, digitisation, manufacturing ambitions—become accessible without a penalty. For global allocators, the playing field is level again.

Sectors positioned to gain

• Information Technology: India’s largest service export benefits from improved bilateral sentiment and smoother market access.
• Pharmaceuticals and chemicals: Generic drug suppliers and specialty chemical makers gain from reduced trade friction as supply chains diversify from China.
• Auto components: Indian ancillary suppliers become more price-competitive against Southeast Asian rivals.
• Textiles and apparel: This labour-intensive sector, hammered by high tariffs, gets a lifeline with the drop from 50 per cent to 18 per cent.
• Gems and jewellery: A significant export category that gains directly from the tariff cut.

The risks to watch

• Implementation uncertainty. The deal was announced via social media. Formal documentation, US congressional scrutiny, and actual execution could surprise.
• Russian oil transition. India imports 1.5 million barrels daily of discounted Russian crude. Shifting to pricier US or Venezuelan oil could pressure inflation and refinery margins. Compliance remains uncertain.
• Earnings still need to deliver. The deal improves the backdrop, but corporate results remain the fundamental driver. Markets need follow-through, not just sentiment.

What investors should do

For long-term investors with SIPs, the message is simple: stay the course. Days like today remind us that sentiment shifts faster than fundamentals.

For those with fresh capital, export-oriented sectors deserve attention. Look for companies with established US presence and reasonable valuations. The tariff cut is a tailwind, but business quality still matters.

The STT hike hurt trader sentiment, but for long-term investors, derivatives taxation is irrelevant. What matters is the earnings trajectory of the companies you own. On that count, the trade deal is a clear positive.

The bottom line

Within one week, India has secured trade wins with both the European Union and the United States. As global supply chains reorganise and countries seek alternatives to concentrated dependencies, India is positioning itself as the prime beneficiary.

Will FIIs rush back immediately? Probably not. They’ll want to see implementation and earnings impact first. But this deal removes an excuse to stay away and provides a reason to re-engage.

The immediate market reaction will be euphoric. The durable impact depends on execution. But on a morning when Gift Nifty points to a 3 per cent gap-up, the long-term case for Indian equities just got stronger.

Stay invested. Stay patient. The tide may finally be turning.

Also read: SGB shock: The budget rule change and your next move