India-US Trade Deal Ignites Stock Market Surge and Economic Optimism
The recently announced India-US trade deal has sent waves of positivity through the Indian financial markets, with immediate effects visible in stock indices and currency movements. US President Donald Trump's decision to reduce tariffs on Indian goods to 18%, effective immediately, has been hailed as a transformative development for bilateral trade relations.
Market Response and Immediate Benefits
The stock market has responded with remarkable enthusiasm to this breakthrough agreement. Both the BSE Sensex and Nifty50 have witnessed strong rallies, reflecting renewed investor confidence. According to a comprehensive report from Motilal Oswal Financial Services (MOFSL), this represents a significant shift in India's economic positioning.
The 18% tariff reduction not only enhances the competitiveness of Indian exports in US markets but also sets in motion a cascade of positive developments that could substantially improve the performance of Indian financial markets. This development comes after prolonged uncertainty surrounding Indo-US trade negotiations, which had negatively impacted market sentiment throughout the past year.
Key Sectoral Beneficiaries Identified
MOFSL's analysis highlights several sectors poised to benefit substantially from the trade agreement:
- Auto Ancillaries
- Defence
- Consumer Goods
- Textiles
- Electronics Manufacturing Services (EMS)
- Consumer Durables
- IT Services
- Financial Services (as secondary beneficiaries)
- Utility Companies
These sectors, particularly those with significant export exposure to the United States, stand to gain from improved competitiveness and market access.
Reversal of Negative Trends
The trade deal announcement comes at a crucial juncture for Indian markets. Since April 2024, strained Indo-US trade relations had created uncertainty that negatively affected foreign institutional investor (FII) sentiment. India was perceived to have limited leverage in negotiations with the United States, leading to significant capital outflows.
Consequently, India underperformed its emerging market peers by approximately 40% over the past year, with FIIs withdrawing around USD 22 billion from Indian equities since January 2025. Additionally, the Indian rupee depreciated by about 6% against the US dollar during this period.
MOFSL analysts believe these adverse trends are now likely to reverse, with several constructive developments expected:
- Potential reversal of foreign institutional investor outflows
- Recovery in the rupee's value
- Improved overall confidence in Indian equities
- Renewed momentum in foreign direct investment
- Narrowing of India's recent underperformance relative to other emerging markets
Competitive Advantages in Global Trade
The tariff reduction restores significant competitiveness to Indian exports in the US market. While some advanced economies including Switzerland, the European Union, the United Kingdom, Japan, and South Korea continue to enjoy lower tariff rates, competitive pressure from these markets is expected to remain limited.
This limitation stems from differences in their positions along the global value chain and relatively small overlap with Indian export products. More importantly, most of India's direct competitors in the US market now face higher duties, including major emerging-market exporters such as China, Vietnam, Brazil, Thailand, and South Africa.
Earnings Growth and Valuation Prospects
With the trade deal announcement, markets are expected to properly recognize the improving trajectory of corporate earnings growth in India. Earnings have shown successive improvement over recent quarters with a positive revision trend.
MOFSL had anticipated 16% year-over-year growth in profit after tax at the beginning of the third quarter of fiscal year 2026, with results aligning with these estimates. The firm projects approximately 12% earnings growth for Nifty companies between fiscal years 2025 and 2027.
Current Nifty valuations at 20.4 times earnings remain reasonable, sitting below the 10-year average of 20.8 times. With the latest developments, there exists significant potential for valuation expansion in the coming period.
The trade agreement is expected to deliver broad-based gains for both Indian financial markets and the wider economy, resetting the foundation for India's strong performance over an extended time horizon. This event carries what analysts describe as a structurally "positive allocation effect" that could reshape investment flows toward Indian assets.
