The recently inked India-EU Free Trade Agreement (FTA), hailed by Prime Minister Narendra Modi as the "mother of all deals", has been met with a surprisingly muted response from the markets. While the long-awaited agreement promises to reshape trade flows between the two regions, the initial reaction suggests that investors are taking a more cautious, wait-and-see approach.
The FTA, finalized on January 27, 2026, after nearly two decades of negotiations, aims to create a market of approximately 2 billion people. The EU will eliminate tariffs on over 90% of Indian goods, potentially slashing duties to zero on nearly $33 billion of exports. In return, India will scrap tariffs on most European industrial imports and significantly reduce car duties. The EU anticipates that the agreement will double EU exports to India by 2032 and save European companies around €4 billion annually in duties. Commerce Secretary Rajesh Agrawal stated that negotiations between India and the EU have been successfully concluded and the FTA is set to be announced.
So, why the market's lukewarm reception? Several factors appear to be at play.
One major concern revolves around the auto sector. News of the deal led to a sharp fall in the shares of Indian auto companies like Mahindra and Mahindra, as well as a dip in the Nifty Auto index. The primary reason for this negative sentiment is the fear that reduced import duties on European cars will intensify competition for domestic manufacturers. While the agreement stipulates that lower duties will only apply to vehicles with a landed value exceeding $15,000, investors worry about the potential impact on margins and market share, particularly in the premium car and SUV segments.
Another reason for the market's subdued response is that the benefits of the FTA are expected to materialize gradually. While the EU will remove or reduce tariffs on over 99% of Indian exports by value, India will lower tariffs on a large share of EU exports in phases, protecting sensitive sectors. Some tariffs will be eliminated immediately, while others will be phased out over 5, 7, or 10 years. This phased approach, while providing a buffer for domestic industries, may have tempered immediate market enthusiasm.
Furthermore, the FTA's impact is not universally positive across all sectors. While textile stocks surged, with some companies experiencing gains of up to 12%, other sectors face potential challenges. Small and mid-sized manufacturers in industries like machinery parts, chemicals, and engineering goods may experience margin pressure as EU firms gain ground with their scale, technology, and branding advantages.
Despite the initial market reaction, many analysts believe the India-EU FTA holds significant long-term potential. The agreement is expected to boost Indian exports, attract high-quality European investment, promote industrial growth, and strengthen India's integration into global value chains. Sectors like textiles, apparel, leather, footwear, gems and jewelry, marine products, and engineering goods are expected to be major beneficiaries. The FTA also aims to liberalize trade in services, particularly in IT, digital, healthcare, and professional services, while promoting the easier movement of skilled professionals between India and the EU.
In conclusion, while the India-EU FTA is a landmark agreement with the potential to reshape trade relations between the two regions, the market's initial cold shoulder reflects concerns about increased competition in certain sectors, the gradual implementation of tariff reductions, and the uneven distribution of benefits across industries. As the agreement is implemented and its effects become clearer, a more comprehensive assessment of its impact on the markets will be possible.
