What happened: Markets rally on trade deal but fail to sustain momentum
Indian equity markets responded positively to the recently concluded India–US trade deal but have so far failed to reclaim their record highs, as investors weigh the practical impact of the agreement against domestic earnings trends and global risks.
The deal, announced earlier this month, effectively lowers US reciprocal tariffs on Indian exports to 18% from as high as 50%, a move widely seen as supportive for trade flows. The announcement initially triggered a sharp rally on February 3, when the Nifty 50 jumped 1,252.80 points, or about 5%, to an intraday high of 26,341.20, while the Sensex surged 4,205 points to 85,871.73, according to exchange data.
However, the rally proved short-lived. By around 2:25 pm on February 11, the Sensex was down about 63 points (0.07%) at 84,211, while the Nifty 50 was up just 11 points (0.04%) at 25,945.70, indicating consolidation rather than a continuation of the surge.
Both indices remain below their lifetime peaks. The Nifty 50 had touched 26,373.20 on January 5, while the Sensex hit 86,159.02 on December 1. The inability to retest or surpass these levels has prompted debate among investors about what is capping the market’s upside.
Why it matters: Trade relief alone may not drive equity re-rating
The India–US trade deal is significant from a policy and geopolitical standpoint. Lower tariffs can improve competitiveness for Indian exporters, support manufacturing and strengthen bilateral ties. For sectors such as textiles, engineering goods and select manufacturing segments, the reduction in tariffs could, over time, improve margins and volumes.
But for equity markets, tariff relief is only one variable. Stock prices are ultimately driven by earnings growth, liquidity and valuations. If these pillars do not align, even positive policy news may not translate into a sustained rally.
For institutional investors, the key question is whether the trade deal can materially shift earnings trajectories or capital flows. So far, the market appears to be waiting for evidence rather than reacting to headlines alone.
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What we know so far: Tariff cuts, rallies and current levels
Several facts are clear from the recent developments:
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The US reduced reciprocal tariffs on Indian exports to 18% under the new framework.
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The deal followed a telephonic conversation between US President Donald Trump and Prime Minister Narendra Modi.
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Trump said on social media that the reduction was agreed “out of friendship and respect” and described Modi as a respected leader.
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Markets rallied sharply immediately after the announcement but gave up part of those gains.
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Benchmarks remain below all-time highs despite the policy breakthrough.
According to exchange data, the initial rally suggests that markets welcomed the removal of a tariff overhang. The subsequent pullback indicates that investors quickly shifted focus to fundamentals.
What remains unclear: Implementation details and policy sensitivities
A key source of caution is that the deal currently operates as a framework, with several operational details still evolving.
Vaqarjaved Khan, Senior Fundamental Analyst at Angel One, pointed to implementation uncertainty and execution risks. He noted that formalisation is pending and that certain commitments—such as a reported $500 billion procurement figure—have not been officially confirmed by India.
There are also politically sensitive areas. Commitments related to Russian oil imports or agricultural market access could face domestic scrutiny, potentially affecting timelines or scope. It is not yet clear how these issues will be navigated.
In addition, the tariff reduction does not automatically translate into higher export volumes. Trade flows depend on demand conditions, supply chains and competitiveness relative to other countries.
Market or sector impact: Sentiment positive but not broad-based
The deal has improved sentiment and reduced a geopolitical overhang, but its sectoral impact has been uneven. Export-oriented sectors may benefit over time, but the gains are not yet visible in aggregate earnings.
Tanvi Kanchan, Head of Strategy at Anand Rathi Share and Stock Brokers, said that while the 18% tariff improves India’s position against countries like Vietnam and Bangladesh, many competitors still enjoy duty-free access under the US Generalized System of Preferences. That limits India’s unique advantage.
She added that weak US retail data and volatile IT stock performance are also weighing on sentiment. Given the large weight of IT in Indian indices, global tech uncertainty can dilute the positive effects of trade policy.
Broader context: Valuations and liquidity shape market ceilings
Indian equities have rallied strongly over the past few years, leaving valuations elevated by historical standards. In such an environment, incremental positive news may have a smaller marginal impact on prices.
Pranav Koomar, Founder and CEO of PlusCash, said that a significant portion of the optimism had already been priced in. “Valuations remain relatively high, and there is not much room on the upside for markets to move substantially,” he said, adding that investors are also watching domestic rates and global liquidity.
Liquidity conditions are another factor. According to market participants, foreign institutional investor (FII) flows have been selective rather than broad-based. Foreign investors play a key role in price discovery and momentum in Indian markets.
When foreign flows are cautious, markets often struggle to stage breakaway rallies.
What analysts and officials are saying: Earnings remain the missing link
Several market experts converge on one theme: earnings.
Siddharth Maurya, Founder and Managing Director at Vibhavangal Anukulakara, said that while the trade deal has improved sentiment, “earnings momentum is yet to pick up.” He added that markets move primarily on liquidity and quarterly numbers.
Balaji Rao Mudili of Bonanza pointed to additional headwinds, including potential disruption in the IT sector from new AI platforms and geopolitical risks affecting oil prices.
Another strategist noted that foreign investors are waiting for tangible signals such as:
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Clear earnings recovery
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Rupee stability
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Trade deal implementation clarity
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Stabilisation in global tech demand
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Acceleration in domestic growth
Without these, they are likely to remain on the sidelines.
What it means for investors or stakeholders: Patience over exuberance
For investors, the current phase suggests a shift from headline-driven optimism to data-driven caution. The trade deal is a structural positive, but it may play out over quarters rather than weeks.
Long-term investors may see value in sectors that benefit from improved trade access, but short-term traders could face range-bound markets until stronger catalysts emerge.
Key takeaways for investors include:
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Policy positives do not replace earnings growth
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Elevated valuations require stronger justification
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FII participation remains crucial
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Global cues still influence domestic indices
What to watch next: From announcements to actual flows
Market participants say the next triggers will likely be:
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Evidence of higher trade flows under the new tariff regime
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Corporate earnings trends in coming quarters
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Direction of FII flows
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Global risk sentiment and US data
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Currency stability and oil prices
As Khan of Angel One put it, the next leg of the rally will require “demonstration of actual trade flow improvements, not just headline announcements.”
For now, Indian markets appear to be in a wait-and-watch mode—acknowledging the strategic importance of the India–US trade deal, but reserving a full re-rating until fundamentals catch up.
