MUMBAI: The landmark trade agreement between the United States and India is projected to generate a favorable influence on foreign fund purchasing activity within Indian markets, potentially counteracting the substantial outflows observed from the stock market over recent months. This development comes as a significant relief to market participants who have been grappling with persistent selling pressure from international investors.
Lifting Market Overhang and Improving Sentiment
On one hand, the trade pact eliminates a longstanding uncertainty that has weighed heavily on market dynamics, which in turn is expected to enhance investor perception of India on the global stage. Furthermore, this agreement could contribute to strengthening the Indian rupee, and when combined with robust corporate earnings performance, may serve as a powerful magnet to attract foreign capital back to Indian shores in a substantial manner, according to insights from top brokerage officials.
Recent FPI Outflow Trends and Market Impact
Throughout 2026, foreign portfolio investors have recorded net sales of equities amounting to nearly Rs 35,000 crore within the Indian market. This follows an even more significant divestment of Rs 1.7 lakh crore worth of stocks during 2025. This sustained selling activity has consequently exerted downward pressure on the rupee's valuation.
Despite aggressive intervention efforts by the central government, the Indian currency has depreciated by over 6% since the beginning of 2025. The FPI selling spree in India has also contributed to the relative underperformance of domestic markets, with the Nifty index registering a modest 7.4% gain over the past year until February 2, while the Sensex increased by 5.8% during the same period.
In striking contrast, South Korea's Kospi Composite index more than doubled in value during this timeframe, and Brazil delivered returns of 45%. The underperformance of Indian equities over the past year can be traced, at least in part, to large and persistent FPI outflows, explained Sujan Hajra, chief economist and executive director at Anand Rathi Group.
Geopolitical Factors Driving Capital Flight
These investment flows were primarily driven by escalating geopolitical tensions and policy uncertainties surrounding India's trade relationship with the United States. For global investors, deteriorating India-US relations translated into higher perceived risk premiums, currency volatility, and capital flight, even as domestic corporate earnings remained relatively resilient.
With the India-US treaty now formally established, that persistent overhang is beginning to dissipate. The crucial transformation is not merely incremental tariff relief, but the restoration of geopolitical and trade stability. As risk premiums normalize, India once again appears investable to global capital—a high-growth, politically aligned, strategically important economy with deep domestic demand and improving external linkages to both the US and European markets, Hajra elaborated.
Recent Market Activity and Future Outlook
In Tuesday's trading session, net inflows by foreign portfolio investors reached Rs 5,236 crore, marking the most substantial single-day inflow witnessed in three months, according to data from the Bombay Stock Exchange. Market participants, however, caution that this could represent an isolated occurrence, though the overall direction of investment flows is likely to undergo a positive transformation in the near future.
The trade agreement's implementation is expected to create a more conducive environment for foreign investment, potentially reversing the trend of capital outflows that has characterized recent market behavior. This development holds particular significance for India's economic trajectory, as it seeks to reinforce its position as an attractive destination for international capital while stabilizing its currency and enhancing market performance relative to global peers.
