After months of prolonged uncertainty and anticipation, the landmark India-US trade agreement has finally been sealed, injecting fresh optimism into the financial markets. The breakthrough was met with immediate enthusiasm on Dalal Street, where benchmark indices, the Sensex and Nifty, surged by an impressive 3% during Tuesday's trading session.
Tariff Reductions and Market Implications
The pivotal development unfolded on Monday evening when US President Donald Trump announced a significant reduction in tariffs, slashing them from 25% to 18%. Furthermore, media reports indicate that an additional 25% tariff previously imposed on purchases of Russian crude oil has also been eliminated. This move effectively removes a major overhang that had been weighing heavily on stock market investors, clearing a path for renewed confidence.
Reversal of FPI Outflows and Rupee Strength
Analysts are highlighting multiple positive ramifications stemming from the trade deal. Beyond providing a substantial impetus to export-oriented sectors, the agreement is expected to catalyze a reversal of the relentless foreign portfolio investor (FPI) outflows and bolster the strength of the Indian rupee.
Over the past year, FPIs have largely steered clear of the Indian equity market, turning net sellers in eight out of twelve months. They offloaded a staggering record of ₹166,286 crore, driven by the elusive trade deal, an earnings slowdown, and a perceived lack of artificial intelligence-themed investment opportunities. This selling pressure extended into January 2026, with net outflows of ₹35,962 crore. However, a promising shift occurred in the first two sessions of this month, witnessing buying worth ₹1,906 crore.
Consequently, India's stock market has significantly underperformed its global peers by approximately 40% over the past year. Compounding this, the Indian rupee depreciated by around 6% against the US dollar, despite a concurrent slide in the dollar index. Domestic brokerage Motilal Oswal Financial Services (MOSL) posits that many of these adverse trends are now poised for a reversal.
Expert Insights on Capital Inflows
Divam Sharma, Co-Founder and Fund Manager at Green Portfolio PMS, offered an optimistic outlook: "A substantial portion of US FII capital is likely to shift towards India, viewing the nation as the premier strategic play among emerging markets. The prevailing high pessimism will likely get trapped in a sharp rally fueled by short covering. Domestic institutional investors (DIIs) and retail participants will pile in, amplifying flows from all directions—investors should prepare for significant upside potential."
The Role of Domestic Investors
Throughout the challenging period of FPI exits, domestic institutional investors (DIIs) provided crucial support through uninterrupted net buying across all months, consistently countering the selling pressure. Steady systematic investment plan (SIP) inflows from retail investors also helped mitigate India's market losses. Notably, the Nifty still managed to rise 10% last year. Experts suggest that in the absence of such supportive retail inflows, the market's underperformance could have been even more pronounced.
Kranthi Bathini of Wealthmills Securities emphasized the synergy required for a robust bull market: "For a strong, secular bull market, participation from both FIIs and DIIs is essential. You cannot clap with one hand. Over the last eighteen months, we witnessed DIIs buying consistently, yet the market largely remained range-bound. There is a sense of exhaustion now. Markets move meaningfully only when both FIIs and DIIs participate in tandem. That is when you achieve a strong, sustainable bull market."
Bathini believes the trade deal serves as a very positive signal for foreign portfolio investors and acts as a powerful sentiment booster for the overall market ecosystem.
Retail Investor Outlook: Patience Required
A critical question now emerges: With FPIs expected to return emphatically, will retail investors' patience finally yield rewards? Experts affirm that the answer is yes, but caution that the impact will likely materialize with a lag.
Retail investors typically allocate a higher proportion of their investments to mid- and small-cap stocks compared to large-caps. The pain has been deeper in the broader market space. With FPIs anticipated to return to Dalal Street, analysts foresee a revival, but this process may unfold over a horizon of one to three years.
Sectoral Rotation and Long-Term Projections
Market veteran Sunil Subramaniam noted that while inflows into mid- and small-caps have been steady, fund managers have been deploying a significant portion—nearly 30–35% as permitted by SEBI—of inflows into large-cap stocks within schemes catering to the broader market, seeking relative stability and better risk-adjusted returns.
This trend, however, is expected to reverse over the next two to three years, with mid- and small-cap stocks likely to significantly outperform their large-cap counterparts. The trade deal is viewed as incrementally positive for MSME-linked sectors such as textiles, leather, chemicals, and auto ancillaries, which constitute a large part of the broader market universe.
Once FIIs return meaningfully, they are expected to channel funds into IT and pharmaceutical stocks—segments dominated by large-cap companies. Concurrently, DIIs are likely to rotate their investments towards mid- and small-cap names. This rotation, however, is anticipated to play out gradually, taking five to six months, with tangible returns potentially becoming visible only after a year or more, Subramaniam explained.
He described today's market rally largely as a catch-up move and suggested that gains are likely to be more moderate going forward. "Patience, therefore, remains paramount. Over a two- to three-year horizon, mid- and small-cap stocks are expected to deliver a compound annual growth rate (CAGR) of 15–18%, compared with 12–15% for large-caps," he opined, which bodes well for steadfast retail investors.
The Earnings Imperative
Another crucial factor that must align is earnings recovery. Nikunj Saraf, CEO of Choice Wealth, underscored this point: "Trade agreements create opportunity, not guaranteed outcomes. If earnings growth does not follow in the next few quarters, markets will eventually move on from this narrative."
Saraf also noted that retail patience will pay off, but not instantly. "For retail investors who remained invested despite volatility, this improves the backdrop. Markets often reward patience when risks diminish. However, patience pays off fully only when companies convert this improved environment into higher revenues and profits. Sentiment can lift prices temporarily, but sustainability derives from solid earnings."
In the current phase, he advised investors to be sensible rather than aggressive, focusing on picking fundamentally strong companies instead of merely chasing momentum.
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms. Investors are advised to consult with certified experts before making any investment decisions.
