India-US Trade Deal Likely on Horizon: What Could a Sharp Reduction in Tariffs Mean for the Indian Stock Market?

A potentially transformative trade deal between India and the United States is nearing completion, promising to significantly reduce tariffs on Indian exports. According to sources familiar with the matter, the agreement could slash tariffs on Indian goods from the current punishing rate of 50% to approximately 15-16%. This development has sparked considerable optimism, with analysts predicting a positive impact on the Indian stock market.

Deal Details and Potential Concessions

The trade deal is expected to involve concessions from both sides. India may agree to gradually reduce its imports of Russian crude oil, which currently account for about 34% of India's crude imports. In return, the US is expected to offer concessions on energy trade and provide greater market access for non-genetically modified (GM) American corn and soymeal. India is reportedly considering increasing the quota for importing non-GM maize from the US, even though the duty on these imports will remain unchanged at 15%. Sensitive issues such as dairy are still under discussion.

Impact on Indian Exports and GDP

The US is India's largest market for merchandise shipments, with exports reaching $86.51 billion in FY25. A sharp reduction in tariffs could provide substantial relief for Indian exporters and boost overall trade volumes between the two nations. Experts estimate that if the current 50% tariffs remain in place, India's export volume to the US could decline by 30% next year. Reduction in tariffs could prevent this decline and potentially increase exports, contributing to GDP growth.

Stock Market Implications

The Indian stock market has reacted positively to news of the impending trade deal. The Nifty 50 is nearing its all-time high, fueled by optimism surrounding the potential agreement. Foreign institutional investors (FIIs) have also turned positive, pumping over Rs 7,300 crore back into Indian equities after a period of selling.

Several sectors are expected to benefit from the reduced tariffs, including:

• Textiles, Leather, and Gems & Jewellery: These sectors have been among the hardest hit by the existing tariffs and could see a significant rebound in exports.
• Pharmaceuticals: The pharmaceutical sector has remained resilient despite the tariffs, and a trade deal could further boost export orders to the US.
• Engineering Products: This sector is also expected to gain from increased access to the US market.
• Automobiles and Auto Components: Margins in this sector have been under pressure due to weaker overseas demand, and a trade deal could provide some relief.

Potential Challenges and Considerations

While the trade deal is largely viewed as positive, some challenges and considerations remain:

• Final Political Clearance: The broad contours of the agreement are reportedly in place, but final political clearance is still pending.
• Terms of the Deal: The specific details of the agreement, including the extent of tariff reductions and the concessions required from India, will be crucial in determining the overall impact.
• Global Oil Markets: India's potential reduction in Russian oil imports could have implications for global oil markets and geopolitical alignments.
• Strategic Autonomy: Experts have cautioned India to hold firm on its red lines in agriculture, digital trade, e-commerce, and intellectual property, and avoid any anti-China clauses that could limit its strategic autonomy.

Conclusion

The India-US trade deal holds significant promise for boosting bilateral trade and investment. A sharp reduction in tariffs could provide a major fillip to Indian exports, stimulate economic growth, and drive positive sentiment in the stock market. While some challenges and uncertainties remain, the potential benefits of the agreement appear substantial. The deal could be announced at the ASEAN Summit later this month.