US-India Trade Deal Sparks Sharp Rally in Indian Rupee and Stock Market

The United States and India have reached a trade agreement, with the US significantly reducing tariffs on Indian goods from 50% to 18%. Boosted by this news, Indian financial markets surged sharply on Tuesday. Investors indicated that this development removes a major negative factor that had been looming over Indian stocks, bonds, and the currency market.

India's benchmark stock index, the Nifty 50, soared nearly 5%, coming within just about 100 points of the all-time high set in January. During early trading, the Indian rupee appreciated over 1% against the US dollar, reaching 90.40 rupees per dollar. The yield on India's 10-year benchmark government bond fell 5 basis points to 6.72%.

This gain for the Nifty 50 index puts it on track for its best single-day performance in five years, while the rupee's movement is also poised for its largest single-day gain since November 2022.

US President Donald Trump announced the agreement on social media following a phone call with Indian Prime Minister Narendra Modi, stating that India has agreed to halt purchases of Russian oil and lower trade barriers for US export goods.

Since the US government imposed higher tariffs on India in late August, Indian stocks and the rupee have faced sustained pressure, with foreign capital outflows hitting a record high. Consequently, Indian assets ranked among the worst-performing emerging market assets for 2025.

The market views this breakthrough in US-India trade as likely to alleviate the long-term drag on Indian markets. Investors anticipate that overseas investment sentiment towards India will improve, leading to a renewed inflow of foreign capital into various Indian asset classes.

Prashant Paroda, a portfolio manager at the AllSpring Global's Rigor Emerging Markets Equity team, stated, "We believe the announcement of this trade agreement will eliminate a key negative factor facing the Indian stock market. Overseas investors, who have been persistent net sellers recently, may consequently increase their allocation to Indian assets."