India Mutual Funds Rebound on U.S. Trade Deal and Earnings Turnaround — A Viral Sentiment Shift

The market's mood swung sharply in February. After a subdued January, equity mutual fund inflows rose 8.1% month-on-month to 259.78 billion rupees, marking the first gain in three months. This rebound is the main character in this story, a direct reaction to two trending financial topics that lifted sentiment: a major U.S. trade deal and a stabilization in corporate earnings.

The contrast with January is stark. That month was defined by fear, as foreign portfolio investors pulled out about $4 billion from Indian equities amid rising trade risks. Inflows fell 14.35% month-on-month, and major indices like the Nifty 50 and Sensex dropped over 3%. The market was in retreat.

Then came the catalyst. In early February, India struck a trade deal with the U.S., bringing down the tariff on Indian goods to 18% from 50%. This was a viral shift in sentiment, directly addressing the headline risk that had spooked foreign investors. At the same time, the earnings picture began to stabilize. While headline profit growth for the Nifty 50 was still in single digits, the third quarter ended Dec. 31, Nifty 50 companies posted a 7.5% year-on-year profit growth, up from 1.9% in the previous quarter. Analysts saw early signs of a recovery, with the new labour codes having created a one-time hit that was now in the rearview.

Foreign investors, who had been net sellers for three months, turned net buyers in February after three months of outflows, purchasing shares worth 226.15 billion rupees. This capital flow reversal, from a $4 billion outflow to a significant inflow, shows how quickly market attention can pivot when the news cycle shifts. The February inflow surge is the tangible result of that viral sentiment change, driven by a resolution to trade tensions and a clearer view of earnings turning the corner.

The Trade Deal's Viral Sentiment: A Headline Risk Lift

The February trade deal was a direct response to a major source of headline risk. For months, the market had been spooked by the threat of punitive tariffs. The U.S. had imposed steep tariffs on Indian exports in 2025-first at 25%, then doubled to 50% in response to stalled talks and India's continued oil purchases from Russia. This created a volatile, unpredictable environment that hurt exporters and dampened foreign investor confidence.

The deal's core financial implication is the elimination of that 25% tariff. The U.S. signed an executive order eliminating the additional ad valorem rate of duty of 25% on imports of articles from India, effective February 7. This single move removed a key overhang for sectors like textiles, leather, and machinery, restoring a degree of predictability to their export plans. In return, India agreed to eliminate or reduce tariffs on all U.S. industrial goods and a broad range of U.S. food and agricultural products, creating a more balanced, reciprocal framework.

The ambition of the deal is clear in its purchase target. Both sides committed to a $500 billion purchase target for Indian goods over five years, a figure that signals a long-term shift in trade volume. However, this promise is already showing signs of diplomatic recalibration. The White House quietly revised key parts of the deal document within days, softening the language on the purchase target and removing references to Indian tariffs on pulses. These changes indicate the agreement is still fluid and subject to negotiation, not a final, ironclad contract.

The bottom line is that the deal lifted a massive overhang. By cutting the tariff on Indian goods from 50% to 18%, it directly addressed the fear that had driven foreign capital out in January. This is the headline risk that was lifted, making Indian equities a more attractive destination for the inflows that followed. Yet the fact that the framework is interim and terms are being adjusted shows the underlying tensions haven't vanished. The market's viral sentiment shift was real, but the trade deal itself remains a work in progress.

Earnings Momentum: The Foundation for Outperformance

The February flow surge wasn't just a reaction to headlines; it's being validated by a tangible earnings turnaround. The core metric is a clear acceleration in profit growth. For the quarter ended December 31, Nifty 50 companies posted a 7.5% year-on-year profit growth, up from 1.9% in the previous quarter. This marks a decisive shift from stagnation to modest expansion, providing the fundamental floor that makes the market's resilience credible.

Analysts see this as the start of a longer recovery. Brokerages project earnings growth of 10-15 per cent in 2026, with further acceleration expected in 2027. This forward view is critical. It suggests the recent rally is not a speculative bubble but a re-rating based on improving fundamentals. The growth is also broad-based, with BSE 500 companies reporting 16% profit expansion, led by energy and consumer discretionary firms. This widespread improvement, driven by strong festive and rural demand and easing input costs, indicates the recovery is not reliant on a handful of megacaps.

Yet, the picture isn't uniformly positive. The recovery is still in its early innings. Even with the Q3 acceleration, headline earnings growth has stayed in single digits for a seventh straight quarter. More importantly, the sectoral split shows vulnerabilities. While the broader market expands, information technology stocks lagged in the quarter, a key overhang that continues to pressure the market. The IT index has fallen about 12% so far in 2026, a stark contrast to the 9% rally in the Nifty 50 since the start of the year.

This divergence is the market's current tension. The earnings momentum provides a solid foundation for outperformance, but the lagging IT sector and the fact that Indian indices still lag Asian and broader emerging-market peers show the path isn't smooth. The setup is one of cautious optimism: the fundamental engine is starting to turn, but it needs to pull the entire market along. For now, the accelerating earnings growth is the key reason why the February flow surge looks sustainable, not a fleeting sentiment shift.

Catalysts and Risks: What to Watch Next

The February flow surge has set a new trajectory, but the market's next move hinges on a few key catalysts and persistent risks. The setup is one of cautious optimism, where positive momentum must be validated by concrete outcomes.

First, watch the trade deal's finalization. The agreement is still interim, not final, and recent revisions show it's fluid. The White House quietly revised key parts of the deal document within days, softening the language on the $500 billion purchase target and removing references to Indian tariffs on pulses. This diplomatic recalibration signals ongoing negotiation and potential for further shifts. The market's viral sentiment shift was real, but the deal's economic benefits need to materialize to sustain foreign investor confidence. Any slowdown in the promised trade expansion or a return to more rigid terms would be a direct headwind.

Second, the earnings forecast must be met. The bullish outlook from Franklin Templeton, projecting 10-15 per cent earnings growth in 2026, is the fundamental anchor for equity outperformance. The Q3 acceleration to 7.5% profit growth is a promising start, but it needs to be sustained across the next two quarters. If the 2026 forecast is revised lower, the re-rating story weakens. The lagging IT sector, which has fallen about 12% in 2026, is a key test of this broad-based recovery. For the flow surge to hold, the earnings momentum must pull the entire market along, not just the broader indices.

The most immediate risk is a resurgence of foreign outflows. The market's memory is short, and the $4 billion pullout by foreign portfolio investors in January is a stark reminder of how quickly sentiment can turn. If global risk appetite cools or if the trade deal's benefits are slower to appear, that capital could return. The February reversal from outflows to inflows of 226.15 billion rupees was powerful, but it was a response to a specific catalyst. Without a sustained earnings recovery and a finalized, stable trade framework, that inflow could reverse just as quickly.

The bottom line is that the current positive trend is not guaranteed. It rests on two pillars: a trade deal that must be finalized and delivered, and earnings growth that must be sustained. Monitor the diplomatic updates for any shifts in the deal's terms, and watch the upcoming quarterly results for validation of the 10-15% forecast. Until then, the risk of foreign outflows returning remains a real and present vulnerability.