India-US Trade Agreement: A Potential Catalyst for Market Reversal
The recent joint statement between India and the United States regarding a comprehensive trade pact has injected optimism into financial markets, with the GIFT Nifty indicating a positive opening. However, money managers emphasize that a genuine reversal of foreign portfolio investor (FPI) outflows will depend critically on the fine print of the agreement, alongside domestic economic fundamentals.
Sentiment Boost Versus Sustained Reversal
For now, markets are experiencing a technical boost from short-covering by FPIs in derivatives and some cash buying observed in early February. Overseas investors have net purchased Indian equities worth ₹5,908 crore since the trade pact announcement on February 2nd, following three consecutive months of net selling totaling ₹62,338 crore, according to National Securities Depository Ltd data.
"The markets have already priced in the positive news, but the decisive shift in FPI outflow trends will only occur after a detailed analysis of the deal's specifics," stated Nilesh Shah, Managing Director of Kotak Mahindra Asset Management Company. He added that while a "sentimental boost" is likely, sustained foreign investment requires clearer visibility on potential gains for India.
The GIFT Nifty, trading 0.68% higher, suggests a gap-up opening of approximately 180 points. The final framework of the trade deal is anticipated later this week. Whether the Nifty can sustain above the 26,000 mark will hinge on market perception of the deal's benefits, combined with factors like rupee stability and corporate earnings growth.
Key Factors Influencing Foreign Investment Flows
Ashish Gupta, Chief Investment Officer at Axis Mutual Fund, noted: "A sentimental uplift is probable given the joint statement, but reversing FPI outflows also depends on a stable currency and improved earnings trajectory." The Indian rupee depreciated 0.87% over the past year but recovered from a record low of ₹91.99 to ₹90.66 by last Friday. A weaker rupee negatively impacts dollar returns for foreign investors.
The Nifty 50 index experienced significant volatility, plunging from a peak of 26,277.35 in September 2024 to a 52-week low of 21,743.65 in April 2025, largely driven by FPI selling. It has since recovered to 25,693.7, with a record high of 26,373.20 reached in early January.
Chirag Mehta, Chief Investment Officer at Quantum Mutual Fund, explained: "The trade deal reduces uncertainty, which markets view positively. However, sustainability will rely on earnings cues. If earnings growth accelerates, markets can move decisively higher." He emphasized that lower tariffs create opportunities, but sustained earnings growth depends on companies effectively executing new orders and expanding capacity.
Net sales for Nifty companies reporting October-December quarter results grew 6.23% year-on-year, up from 4.31% in the previous quarter. Rajesh Palviya, Senior Vice President at Axis Securities, highlighted: "Market sustainability appears more likely as India has undergone a 15–16 month time correction, with mid- and small-cap stocks adjusting and large-cap valuation concerns easing."
Derivatives Market and Sectoral Implications
Following Donald Trump's re-election in 2024, FPIs turned negative on emerging markets like India due to tariff concerns, selling in both cash and derivatives segments. Net short index futures peaked at 203,219 contracts on February 1st during the Union Budget announcement, declining to 150,250 contracts subsequently. This reduction, alongside cash buying, helped the Nifty bounce 4.6% from its low.
Whether bearish positions will fully unwind depends on Street interpretation of the deal's details and its impact on earnings for US-exposed companies, as well as rupee movements. Of FPIs' total index futures open positions of 237,174 contracts, Nifty accounted for 77%, Bank Nifty 14%, and Nifty Midcap Select 9%.
Akshay Chinchalkar, Managing Partner at The Wealth Company, identified key beneficiary sectors: "Pharmaceuticals, gems and jewellery, technology, digital infrastructure, aviation, automotive parts, manufacturing, and textiles are poised to gain." Mehta added that auto components could be a major beneficiary if preferential tariffs around 18% are secured, alongside specialty chemicals and select industrial sectors.
Details of the Joint Statement and Economic Impact
The joint statement released on February 7th outlines that India will reduce or eliminate tariffs on certain US agricultural products, including dried distillers’ grains, red sorghum, tree nuts, fruits, soybean oil, wine, and spirits. A. Balasubramanian, CEO of Aditya Birla Sun Life Asset Management, commented: "The impact on Indian agriculture may be limited as US products are generally higher-priced, and domestic consumers prefer locally sourced goods."
The US will impose tariffs on Indian textiles, apparel, leather, footwear, plastics, rubber, organic chemicals, home décor, artisanal products, and certain machinery, though these may be rolled back after further discussions. India plans to purchase $500 billion worth of US energy products, aircraft, precious metals, technology, and coking coal over the next five years.
In summary, while the India-US trade pact provides a much-needed sentiment lift to markets, the reversal of foreign investor outflows hinges on a multifaceted assessment. The fine print of the agreement, coupled with rupee stability and robust corporate earnings growth, will ultimately determine whether this optimism translates into sustained capital inflows and market resilience.
