Indian stocks poised for foreign buying surge after US trade deal

Trade deal's finalisation comes just a day after Budget, which offered fresh support for exporters and sectors including rare earths, reinforcing early signs of improving investor confidence

By Ashutosh Joshi, Alex Gabriel Simon and Abhishek Vishnoi

 

Indian equities are primed to ease their run of underperformance after a long-awaited trade agreement with the US, which removes a key overhang on financial assets that had triggered record foreign outflows. 

US President Donald Trump agreed to cut tariffs on Indian goods to 18 per cent from 25 per cent and eliminate an additional 25 per cent duty linked to the purchases of Russian crude oil. Fund managers see the deal as a potential catalyst for global investors to return to Indian equities after the market’s worst January since 2016, while also supporting a rupee that has hit record lows. Early market reaction signaled rising risk appetite.

 

 

“This is a good reset to India-US trade that may shift foreign investor sentiment toward India to positive,” said Arvind Chari, chief investment strategist at Q India UK. “India’s underperformance versus emerging markets could reverse.”

 

Global investors have sold $3.2 billion of local stocks this year, on top of a record $18.8 billion outflow last year. After a more than 30 percentage-point underperformance versus emerging-market peers, positioning has weakened to the point that in January India’s weight in the MSCI Emerging Markets Index fell below South Korea’s for the first time since December 2021, a contrast to the period when the South Asian nation was challenging China for the top spot. 

 

Nifty 50 futures traded at GIFT City surged as much as 4.5 per cent overnight following the tariff announcement, signaling optimism ahead of Tuesday’s session. Cash equities had shown tentative signs of a rebound earlier in the day, with the NSE Nifty 50 Index climbing 1.1 per cent — its biggest gain in more than two months — even as most Asian markets closed in the red amid a broader regional selloff. The advance showed investors looking past concerns concerns over a proposed tax hike on equity derivatives and a sharp drop in metal prices that weighed on risk assets globally.

 

India’s valuation premium over Asia has also fallen to its lowest in nearly five years as concerns about the tariffs and a drawn-out earnings slowdown weighed on sentiment. The trade deal’s finalisation comes just a day after Sunday’s budget, which offered fresh support for exporters and industries sectors including rare earths, reinforcing early signs of improving investor confidence. 

 

“It’s a great development coming immediately after” the budget announcement “that will lead to a reversal of foreign outflows and also rally in the Indian currency,” said A Balasubramanian, chief executive officer of Aditya Birla Sun Life AMC Ltd. “Close to $100 billion was waiting to enter into India over the next two to three years, pending the tariff settlement with the US.”

 

Still, not all of India’s challenges have eased. Earnings this reporting season have been mixed, and investors are awaiting clarity on India’s commitment to buy $500 billion of goods from the US as part of the deal. At the same time, scope for further monetary easing is narrowing, with economists in a Bloomberg survey expecting the central bank to hold rates on Feb. 6.

 

“The deal that US officials are outlining seems a relatively favorable one, although there will be questions as to whether the $500 billion in purchase commitments ever come to fruition,” said Michael Brown, senior research strategist at Pepperstone Group.

 

For now, investors are looking past near-term uncertainties, drawing comfort from the finalisation of the US-India trade deal and the budget’s growth tilt, which prioritised manufacturing incentives and infrastructure spending. Morgan Stanley expects stronger capital expenditure, services-sector growth and wider AI adoption to underpin earnings growth in the fiscal year beginning April 1.

 

The US trade deal “should now turn” foreign investors’ negative sentiment on Indian assets, Jefferies Financial Group Inc. strategists including Mahesh Nandurkar wrote in a note. “Combined with the recent large EU, UK and other” trade deals, the rupee “could get substantial boost in the near term - this could act as a positive trigger for” foreign portfolio investments.