Strategic Outlook: India Bilateral Trade Agreement – India & United States
Posted On : Wed Feb 04 2026
The recent announcement of a bilateral trade agreement between the US and India marks a pivotal shift for domestic markets. Under the new framework, the US will reduce reciprocal tariffs from 50% to 18%positioning India competitively against Asian peers while India moves toward zero-tariff barriers (specifics pending). We view this as a major catalyst for Indian equities, driven by: a) a potential reversal in Foreign Portfolio Investor (FPI) outflows, a primary market overhang for 15 months, and b) an estimated 50–80 bps boost to nominal GDP growth alongside INR appreciation. Our March 2027 Nifty 50 target is 29,500 (20x FY28E EPS). Key overweight sectors include Financials, Capital Goods, Defense, and Consumer Discretionary.
Trade Mechanics and Energy Shifts: The US tariff reduction to 18% is accompanied by India’s commitment to eliminate non-tariff barriers. Notably, India plans to pivot energy sourcing from Russia toward the US and Venezuela, with a long-term objective of importing over USD 500bn in US goods a significant scale-up from the current sub-USD 50bn annual run rate.
FPI Flow Reversal: Since October 2024, India witnessed record EM outflows of USD 34bn. Given that US-based capital represents ~41% of FPI Assets Under Custody (AUC) and valuation premiums have moderated to long-term averages, we anticipate a sharp trend reversal. Primary beneficiaries include high-FPI-concentration sectors (Real Estate, Telecom, Healthcare) and sectors currently under-owned relative to historical benchmarks (Capital Goods, IT Services, Financials).
Macroeconomic Impact: The 50% tariff regime threatened ~USD 50bn in exports (1.2% of GDP). Relief in labor-intensive segments specifically Gems & Jewelry (USD 9bn), Textiles (USD 11bn), and Machinery (USD 13bn) is expected to add 50–80 bps to GDP. Stronger capital inflows and robust domestic macros should support the INR, particularly as the Real Effective Exchange Rate (REER) sits near decade-lows.
Sectoral Positioning: We expect an immediate re-rating for sectors previously constrained by trade friction, including Banking, Pharma, and Industrials (Power T&D, Cables). Our portfolio remains structurally bullish on India, maintaining an overweight stance on Financials, Capital Goods, Defense, and Consumer Discretionary to capture this fundamental tailwind.
The recent U.S.-India trade deal marks a significant shift in relations.
Below is a concise summary
The Current Deal & Immediate Impact
A Necessary "Floor": The previous situation was unsustainable; a deal was essential to prevent a total collapse of U.S.-India relations.
The 18% Tariff: While 18% is high by historical standards, it is a "smooth landing" compared to the threatened 50% rate.
Competitive Advantage: India now holds a slight edge over competitors, as ASEAN nations are mostly at 19% and Vietnam is at 20%.
Diplomatic Success: U.S. Ambassador Sergio Gor is credited with resetting the tone and moving the relationship "downfield."
Strategic Concerns & Risks
The "Tariff President": President Trump views tariffs as a tool for more than just trade—using them to influence drug policy, foreign alliances, and supply chain choices.
China’s Shadow: China doesn't need to match India’s rate; it only needs to get close enough to complicate "China plus one" manufacturing strategies.
Unrealistic Targets: The goal of India purchasing $500 billion from the U.S. is viewed as a "stretch," given that current exports are only around $83 billion.
The Long-Term "Trust Gap"
Politicization: The relationship, which had been depoliticized since the 2000s, has become political again due to the volatility of the last six months.
Dangerous Precedents: Tying trade penalties (like the 25% oil penalty) to third-country relationships (e.g., Russia) sets a negative precedent for future diplomacy.
Erosion of Trust: Trust is much easier to lose than to build; while the deal is a "win," the underlying ceiling of trust between the two nations may have been lowered.
Bottom Line: India and the U.S. should take the win, but remain cautious. The "fairy dust" has settled, but the collateral damage to the partnership remains.
Disclaimer
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Regards
Amit Vora, CEO