OPINION US, EU trade pacts signal new era for Indian economy; positive for stocks, currency

India-US bilateral trade agreement

• US-India BTA a significant positive trigger for Indian stock markets, currency
• FII sentiment should become positive from medium-term perspective
• USD-INR should stabilize at below 90

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The India-US bilateral trade agreement (BTA) announced last night by US President Donald Trump and confirmed by Prime Minister Narendra Modi immediately sent the GIFT Nifty on an upward trajectory. The immediate positive sentiment is understandable. This deal was more than a year in the making. The US imposed tariffs of 50% on Indian products were hurting exports to the US. Beyond this the US tilt towards Pakistan during and after Operation Sindoor muddied the evolving strategic partnership between India and US.

The negative sentiment added to some FIIs taking a negative view. FIIs also had other reasons to exit, such as the Yen carry trade unwinding, finding other markets at more attractive valuations or providing higher exposure to AI, among other reasons. The combined result of the tariffs hurting exports to the US and FII outflows caused the INR to drop against the USD even a global currency market where USD was falling against other major currencies.

Before going deeper on the impact of this deal for the future, let us look at some hard data.

US-India goods trade in 2024 was $129 billion with Indian exports to the US at $87 billion and US exports to India at $42 billon. In addition, the US-India services trade in 2024 was $83 billion with both exporting around $41.5 billion to each other.

Put together, goods and services trade between India and US is already $212 billion with India importing $83 billion worth of goods and services from the US.

So far the only information available is the tweet by President Trump. It states that India will stop buying Russian oil and buy oil from the US and Venezuela. This, of course, depends on the relative prices of oil from various sources. Some quantum of buying is definitely possible. If not in oil, then possibly LNG, etc.

The tariff will immediately go down from 50% to 18%. This doesn’t sound that great. However, if we compare with other major countries, this is very favourable. China is at 30% tariffs and even Canada and Mexico face 25%-35% tariffs for certain goods. EU has struck a trade deal with 15% tariffs. The 18% tariff on Indian goods sounds quite comparable to the EU deal.

According to Trump’s tweet, India will move forward to reduce the tariffs on American goods to zero. This can be interpreted as a multi-year, probably 5-year, plan to reduce the tariffs in multiple steps to zero.

The tweet further says that India will buy $500 billion of American goods and services. This is likely over the next 3-5 years. Based on the earlier discussion we are already “Buying American” worth $83 billion, including both goods and services. Taking this to $100 billion is not a tall task.

The areas mentioned in the tweet are:

• Energy: This means oil and gas, but could also include nuclear, solar and other clean energy technologies, including battery related. Also coal was mentioned. Clue is to look at some of the provisions in the budget.

• Technology: This is related to AI, data center technology, including power generation for data centers, and possibly nuclear technology. Again some clues can be gathered from provisions in the budget.

• Agricultural: Here, most likely, it means high-end niche products which do not impact the India farmer. For a clue to this one has to look at the exclusions in the India-New Zealand and India-EU FTA. It allowed agricultural products but several segments of agriculture and dairy were completely ruled out in both cases. The same segments will continue being ruled out in the India-US deal to protect the Indian farmer.

To understand the framework of the deal one has to look for clues in the budget and also the other two prominent trade deals concluded recently, viz. the India-EU and the India-New Zealand. Also notice the absence of mention of Defence equipment.

Based on the budget, it is likely that India will be positioned as a data center hub for American companies to support the rest of Asia. This will probably involve joint ventures and lots of FDI in India.

Also, while not mentioned at all, rare earth mining, processing and supply chain from India to the US is likely part of the deal, based on the budget provisions. This would involve buying technology and FDI from the US.

The US-India BTA is a significant positive trigger for, both, the Indian stock markets as well as the currency. This should act as an inflection point for the Indian stock market where the Indian economy was doing extremely well compared to any other major economy but the market continued struggling. FII sentiment should become positive from a medium-term perspective. Similarly, the USD-INR should stabilize at below 90. As more details emerge the impact on different sectors should be visible.

Overall, the start of a new era for the Indian economy with trade deals with the two largest trading regions in the world, viz., US and EU.