The recently announced trade pact between India and the United States has sparked considerable optimism about its potential to reverse foreign investor outflows that have plagued Indian markets. However, the fine print of the agreement will ultimately determine its effectiveness in achieving this goal.
The agreement, revealed after a call between U.S. President Donald Trump and Indian Prime Minister Narendra Modi, involves the U.S. reducing tariffs on Indian goods from 50% to 18%. In return, India will lower or eliminate import duties on specific U.S. products, including certain industrial goods, nuts, fruits, and spirits. This reduction of tariffs is expected to eliminate or reduce tariffs on 96.6% of traded goods by value.
The immediate market reaction to the news was positive. Indian equities experienced an uplift, with Nifty 50 futures traded in GIFT City surging as much as 4.5% overnight. The benchmark NSE Nifty 50 Index closed up 1.06% on February 2, marking its largest gain in over two months. The Indian rupee also strengthened against the dollar. This positive momentum reflects an increasing risk appetite and renewed confidence in Indian assets.
The timing of this trade deal is particularly significant given the substantial foreign institutional investor (FII) outflows India has experienced. In 2025, foreign investors withdrew a record $18 billion from Indian equities, and approximately $3.2 billion has already been divested this year. These outflows have been attributed to concerns over trade tensions, geopolitical risks, and U.S. policy uncertainty. The new trade pact is viewed as a critical step in alleviating these concerns and restoring confidence among foreign investors.
Several analysts believe that the trade breakthrough could reverse the persistent drag on Indian assets by restoring confidence among foreign investors. The reduction in tariffs removes a key overhang that has weighed heavily on Indian assets.
However, the long-term impact of the trade pact will depend on several factors. The fine print of the agreement, including the specific details of tariff reductions and the extent to which India opens its markets to U.S. goods, will be crucial. Economists suggest that a sustainable rally in the rupee and a sustained increase in foreign portfolio inflows will depend on the details.
Moreover, broader global and domestic economic factors will also play a significant role. Investors will closely track retail inflation data and foreign exchange reserves data for insights into price trends and external sector stability. Geopolitical developments, particularly in the Middle East, and global market movements will also influence investor sentiment.
Existing trade flows between the two countries also provide context. In 2024, total U.S. agricultural and food exports to India were valued at $2.25 billion. Tree nuts, especially almonds, dominate this trade, with India importing $1.12 billion worth in 2024 alone. Other significant U.S. exports include ethanol, cotton, pulses, essential oils, fresh fruit, and soybean oil. In contrast, India's agricultural and food exports to the U.S. were nearly three times larger, at approximately $6.2 billion in 2024, including marine products, spices, rice, and dairy products.
In conclusion, the India-U.S. trade pact holds promise for reversing foreign outflows and boosting investor confidence. The immediate market reaction has been positive, but the ultimate success of the agreement will hinge on the details of the fine print and the broader economic context.