India-US deal may spark market rally; FIIs seen returning, rupee rising

The India-US trade deal slashing tariffs to 18 per cent is seen triggering a risk-on rally, attracting FII inflows, stabilising the rupee, and boosting export-led sectors, say analysts.

India-US trade deal: Impact on markets

  After months of negotiations, India and the US agreed to a trade deal Monday night, which slashes the punitive 50 per cent tariffs on Indian goods to 18 per cent. The breakthrough in the impasse is being hailed by market analysts, who see the "risk-on" trigger luring foreign investors back to India, and stabilising rupee.

 

Rising geopolitical and policy uncertainty around India’s trade relationship with the United States had translated into higher perceived risk premia, currency uncertainty and capital flight, even as domestic earnings held up. With the India–US treaty now in place, that overhang is beginning to lift, they said. 

 

 

"The key shift is not incremental tariff relief, but the restoration of geopolitical and trade stability. As risk premia normalise, India once again looks investable to global capital — a high-growth, politically aligned, strategically important economy with deep domestic demand and improving external linkages to both the US and Europe," said Sujan Hajra, chief economist and executive director, Anand Rathi Group.

 

The case for a catch-up rally lies less in near-term earnings upgrades and more in the reversal of capital-market pessimism that the tariff shock and diplomatic friction had previously created, he added.  Check Stock Market LIVE Updates 

A India-US trade deal 'beyond expectations'

The steep decline in tariffs has come as a material surprise to many analysts. By lowering the average tariff floor to 18 per cent, India has not only secured better terms than several of its ASEAN peers but has also effectively neutralized the 25 per cent "penalty" duties previously linked to Russian energy imports, analysts said.

 

"For India, lower tariffs improve access to the US market for labour-intensive exports such as textiles, engineering goods, and pharmaceuticals, supporting jobs and manufacturing scale. The 18 per cent rate brings India broadly in-line with its ASEAN peers and represents the best outcome realistically achievable. For the US, the agreement creates opportunities to expand exports of energy, agricultural products, and advanced technologies," said Nachiketa Sawrikar, fund manager, Artha Bharat Global Multiplier Fund.

 

Sectoral winners 

The 18-per cent tariff rate is being viewed as a "sweet spot" by analysts that may restore the global competitiveness of Indian manufacturers. Analysts point to a massive boost for labour-intensive and high-tech sectors alike.

 

* Textiles and Pharmaceuticals: Enhanced access to the US -- India’s largest export destination -- is expected to stabilise margins and drive higher capacity utilisation.

 

* Engineering and Auto ancillaries: Lower barriers are likely to translate into immediate improvements in order inflows.

 

* Energy and Technology: In a reciprocal move, the US gains expanded access to India’s massive consumer base for advanced tech and agricultural products.

 

Trideep Bhattacharya, president and chief executive officer of equities at Edelweiss MF, remarked that when paired with the recently inked India-EU agreement, this deal constitutes one of the most potent external growth engines for the country in 2026.

 

Road ahead for markets

 

Since the levy of reciprocal tariffs by the US on India in April 2025, Indian markets were hit by persistent FII outflows with risk-off sentiment keeping valuations under pressure. However, the conclusion of this deal, analysts believe, will likely alter the narrative.

 

"The India-US trade deal is a massive positive, arriving at a critical juncture. With valuations corrected and fundamentals rock-solid, a large chunk of US FII capital may shift here, viewing India as the premier strategic play among emerging markets. The sudden announcement may also fuel a short-covering-led rally. Besides, once DIIs and retail investors pile in, flows will amplify leading to significant upside," said  Divam Sharma, co-founder and fund manager at Green Portfolio PMS.

 

Deepak Agrawal, chief investment officer - Debt at Kotak Mutual Fund, added that the reduction in tariffs is a welcome stimulus, which is expected to narrow the balance of payments gap. 

 

"This macroeconomic shift is projected to bolster foreign exchange reserves and provide a stable foundation for the rupee, which has faced significant depreciation pressure over the last six months," he said.

 

That said, analysts said while the "devil remains in the details" regarding long-term execution, the trade deal is likely to shift relative attractiveness back toward India. The focus, they said, now turns to whether corporate earnings upgrades will follow this sentiment-driven surge.