The US and India have finalised a trade agreement reducing tariffs on Indian goods from 25% to 18%. This arrangement depends on India’s ongoing reduction of oil imports from Russia and is set to benefit India’s exports and financial markets.
The deal places India in a better trading position relative to China and aligns its tariffs more closely with ASEAN countries. In the fiscal year 2025, India’s exports to the US amounted to $86.5 billion, while imports from the US were $46 billion, contributing to a 6.7% share of total imports.
Positive Economic Impact
The tariff adjustment is regarded as a positive development for India’s economy, exports, and market sentiment. Further details about the trade agreement are anticipated.
The unexpected tariff reduction from the US is a significant positive surprise for our markets. We anticipate a strong gap-up opening in the Nifty 50, fueling a relief rally that could unwind the bearish sentiment we saw building at the end of January 2026. This is especially potent given the Nifty had corrected nearly 8% from its November 2025 highs amid concerns over stalling trade talks.
Implied volatility will likely spike at the market open before trending lower over the coming weeks as certainty returns. The India VIX index, which closed near a nervous 16 last week, should fall back towards the 12-13 range if the rally holds. We should consider strategies that benefit from this expected drop in volatility, such as selling out-of-the-money put options after the initial market surge.
Currency and Sector Impact
The Indian Rupee is positioned for a significant appreciation against the US dollar. After testing a weak 85.50 level against the dollar just last week, we could see the USD/INR pair break below key support levels towards 84.00. Traders should look at opportunities to short USD/INR futures or buy Rupee call options to capitalize on this strength.
We expect strong outperformance from export-oriented sectors like textiles, auto components, and engineering goods. These sectors were under noticeable pressure, as reflected in the recent data for the December 2025 quarter that showed a 2% year-on-year dip in merchandise exports to the US. Buying call options on leaders in these spaces looks attractive for the weeks ahead.
Historically, we’ve seen that the initial boost from such trade deals can lead to sustained momentum, similar to what was observed in the rally after the US-Mexico-Canada Agreement (USMCA) was finalized. However, we must monitor reports on India’s oil purchases from Russia, as the deal is conditional on continued reductions. Any sign that India is not holding up its end of the bargain could quickly reintroduce risk.
