India-US Trade Deal Announced: Major Tariff Reduction to 18%
The United States and India have announced a landmark trade agreement that significantly reduces reciprocal tariffs from 50% to 18%. This development, confirmed by Chief Economic Advisor V Anantha Nageswaran, is expected to transform India's economic landscape by removing critical barriers to foreign investment.
Removing Uncertainty for Global Capital
According to Nageswaran, the sharp tariff cut will "remove all uncertainty" in the minds of global investors. The previous 50% tariff structure, which included a 25% reciprocal tariff plus an additional 25% penal tariff for purchasing Russian arms and crude, had been in effect for nearly six months. This period witnessed significant foreign investor exits from Indian financial markets amid heightened geopolitical and policy concerns.
"This undoubtedly changes the picture on capital flows," Nageswaran told The Indian Express. "This was the biggest stumbling block for capital flows. This makes a huge, huge difference."
China+1 Strategy Back in Game
The Chief Economic Advisor emphasized that the tariff reduction revitalizes the China+1 strategy, which had been losing momentum. This strategy, where companies diversify manufacturing beyond China, is now expected to drive substantial foreign direct investment (FDI) inflows into India.
"In terms of FDI, the China plus one strategy was the one that was going to drive FDI inflows. Now, China+1 is back in the game," Nageswaran stated.
Immediate Impact on Rupee and Markets
The rupee is anticipated to bounce back strongly when domestic financial markets open on Tuesday. It had settled at 91.51 against the US dollar on Monday, having weakened by almost 7% since the start of 2025 despite the dollar itself falling by nearly 10% against key global currencies.
Nilesh Shah, Managing Director of Kotak Mahindra Asset Management and part-time member of the Economic Advisory Council to the Prime Minister, noted: "When countries are on good terms there is better flow of capital. The announcement of the deal will clear the imaginary constraints and it should lead to increased capital flow into the markets, which in turn will not only lift the markets but also strengthen the rupee."
Reversal of Foreign Investment Outflows
Foreign Portfolio Investors (FPIs) have pulled out nearly $12 billion on a net basis from Indian stock markets since August 2025. This trend is expected to reverse with the new tariff structure that now compares favorably with key export rivals:
- Vietnam, Malaysia, Cambodia, Thailand, Bangladesh, Indonesia: 19-20%
- China: 37%
- India: Now 18% under the new deal
The trade agreement comes shortly after India and the European Union announced their own deal, meaning the two biggest blocks of capital have clearly opened for India, potentially leading to a turnaround in FPI flows this year.
Addressing Weak FDI Inflows
Direct investment inflows have weakened significantly in recent years. According to latest RBI data, November 2025 saw net FDI outflows of $446 million from India—the third straight month of outflows. For the first eight months of 2025-26, net FDI inflows stand at $5.63 billion, up from $959 million in all of 2024-25.
The Economic Survey for 2025-26, tabled in Parliament last week, described India as "a victim of geopolitics" and noted that the rupee's valuation did not accurately reflect India's "stellar economic fundamentals."
Growth Forecast Revisions Expected
Growth forecasts may be revised upward to reflect the sharply improved outlook for the economy in terms of foreign demand for locally-produced goods. Nageswaran indicated that the deal "lends an upside risk to our growth estimates because of the sentiment, confidence, knock-on effects, and so on."
The Economic Survey predicted GDP growth in the range of 6.8-7.2% for the next fiscal year, slightly lower than the government's first advance estimate of 7.4% for 2025-26.
Broader Economic Implications
Shah added a note of cautious optimism: "While the devil is in the details, the deal removes a hanging sword over rupee, equity and rates markets. Let us hope that it is a win-win deal for both the countries as they have a lot to gain through cooperation."
The India-US trade deal represents a significant diplomatic and economic achievement that addresses multiple concerns simultaneously:
- Reduces tariff barriers to competitive levels
- Revitalizes the China+1 manufacturing diversification strategy
- Removes uncertainty for foreign investors
- Strengthens the rupee's position
- Improves prospects for both portfolio and direct investment
This agreement marks a pivotal moment in India-US economic relations and could substantially alter India's position in global supply chains and investment patterns.
