The Indian stock market is poised to resume trading on Tuesday following the Republic Day holiday closure, with market participants closely monitoring two critical external factors: potential relief from aggressive US tariff measures and growing optimism surrounding progress in the India–European Union (EU) trade agreement negotiations.
Market Pressures and Global Uncertainties
On the previous trading session Friday, domestic equities experienced significant downward pressure. This sell-off was driven by multiple factors including sustained foreign institutional investor (FII) outflows, escalating geopolitical risks, investor caution ahead of the Union Budget 2026, and a mixed bag of corporate earnings results for the December quarter.
The market decline reflected not merely local concerns but broader global anxieties about international trade dynamics and capital flow patterns. As global trade becomes increasingly fragmented, Indian markets have shown heightened sensitivity to these external pressures.
India-EU Trade Deal as Economic Buffer
European leaders have arrived in India for the 16th India–EU Summit, where discussions are focused on advancing a long-pending Free Trade Agreement (FTA) designed to strengthen bilateral trade relationships. Market analysts view potential progress on this agreement as a counter-cyclical buffer for the Indian economy during turbulent global trade conditions.
A breakthrough on the FTA could significantly enhance India's participation in global value chains, improve market access to European economies, and support supply-chain diversification efforts. With global trade flows under pressure from tariff threats and protectionist policies in various regions, stronger India–EU economic engagement could help insulate segments of the Indian economy from external shocks.
Timing Amid US Trade Policy Concerns
The timing of the summit carries added significance as it coincides with renewed concerns about US trade policy directions. US President Donald Trump's tariff rhetoric has unsettled global financial markets, particularly following his threat to impose a 10% tariff on European countries that opposed his stance on Greenland. These comments revived fears of broader trade confrontations, negatively impacting investor sentiment worldwide.
Impact on Bond and Currency Markets
Movements in global bond and currency markets have highlighted shifting risk appetites among international investors. Earlier in the week, global investors showed signs of reducing exposure to US assets following Trump's tariff threats. This resulted in falling US Treasury bond prices, pushing yields higher, while the US dollar weakened against several major currencies including the Swiss franc.
Although market movements moderated later in the week, this episode demonstrated how rapidly capital can rotate toward perceived safe assets during periods of uncertainty. In risk-off scenarios, bonds and safe-haven currencies typically attract investment flows, often at the expense of emerging market equities and debt instruments.
Currency Volatility Challenges
Sachin Sawrikar, Founder and Managing Partner at Artha Bharat Investment Managers, emphasized that currency volatility remains a significant challenge for foreign investors evaluating India's risk-adjusted returns. "Currency volatility continues to hinder foreign investment into India, particularly for global investors assessing risk-adjusted returns. While India's long-term growth prospects remain robust, abrupt currency fluctuations significantly erode returns when repatriated to foreign currencies," Sawrikar explained.
He added that such dynamics intensify during global risk-off phases. "In risk-off scenarios, global investors retreat from emerging markets toward safe-haven currencies and sovereign bonds. India typically experiences outflows from both debt and equity markets, exerting downward pressure on the rupee," he noted, highlighting that rising bond yields often reflect foreign portfolio reductions.
Domestic Bond Market Perspectives
From a domestic viewpoint, bond markets remain sensitive to currency pressures and supply-demand dynamics. Namrata Mittal, CFA, Chief Economist at SBI Mutual Fund, indicated that yields are likely to stay elevated for structural reasons. "Bond yields are likely to remain elevated due to tight demand–supply conditions and currency market pressures," Mittal stated.
As Indian markets reopen, investors will be navigating a complex landscape of domestic challenges and global uncertainties, with particular attention to developments in international trade relations and their implications for capital flows and currency stability.
