The recent trade agreement between India and the United States, which involves slashing tariffs to 18%, has triggered a wave of short covering by Foreign Portfolio Investors (FPIs) in the Indian equity market. On February 3, 2026, the Indian stock market witnessed a significant surge, with the Nifty 50 climbing 2.55% to close at 25,727.55 and the Sensex rising 2.54% to finish at 83,739.13. This rally was largely fueled by FPIs unwinding their bearish derivative positions, which had reached record levels.

However, analysts are urging caution, suggesting that this technical bounce needs to be carefully examined. The sustainability of these gains hinges on factors beyond short covering, primarily a robust recovery in corporate earnings and a genuine reversal of FPI flows driven by long-term investment strategies.

FPIs have been holding substantial short positions in Nifty and Bank Nifty derivatives. Market analysts believe that these investors are likely to maintain these positions until more detailed specifics of the US-India trade deal emerge. The agreement, while welcomed, is still subject to execution risks and the influence of global demand conditions.

The India-US trade agreement has been described as a "mutually beneficial" deal. The United States sought greater access to the Indian oil markets, while India aimed to secure a stable export partner. The reduction of tariffs, including those linked to buying Russian oil, and the cut in reciprocal tariffs to 18% are viewed as positive steps. However, experts point out that exports to the U.S. still constitute a relatively small portion of India's overall $4 trillion economy.

Despite the positive sentiment, some analysts are tempering expectations, suggesting that the deal should be seen as a short-term boost and that "one should not expect miracles". The immediate market rally is likely driven by short covering, but sustained gains will depend on fresh, long-term investments.

Seema Srivastava, a senior equity research analyst at SMC Global Securities, believes that the agreement signals policy stability, growth revival, and improved sectoral prospects, boosting investor confidence. She added that the deal reduces geopolitical and trade risks, which is a key factor in FPI allocation decisions and a structural positive that will re-anchor FPIs to India's growth story.

Divam Sharma, Co-Founder and Fund Manager at Green Portfolio PMS, anticipates a shift in US FII capital towards India, viewing it as a premier strategic play among emerging markets. He expects the current pessimism to be countered by a sharp rally fueled by short covering, with domestic institutional investors (DIIs) and retail investors further amplifying the flows.

Concerns remain about the details of the trade agreement and its potential impact. "While the devil is in the details, the deal removes a hanging sword over rupee, equity and rates markets," according to Shah.

Overall, the India-US trade agreement has injected fresh optimism into Dalal Street, highlighting the market's sensitivity to global trade cues. While the short-covering rally provides an immediate boost, the long-term impact on FPI flows and market stability will depend on sustained economic growth, policy execution, and global demand.