India's Rupee, Stocks to Get Tariff-Truce Boost, Investors Say

US President Donald Trump announced on February 2, 2026, that he would reduce tariffs on Indian goods from 25% to 18% following a phone call with Prime Minister Narendra Modi. The move is expected to ease trade tensions and provide relief to Indian exporters who had been hit by high U.S. duties. As part of the agreement, India also pledged to stop purchasing Russian oil and increase its imports from the U.S. and potentially Venezuela.

The rupee had been hitting record lows in recent weeks due to persistent capital outflows and the uncertainty surrounding the trade dispute. Investors had been waiting for a resolution, and the tariff reduction is seen as a positive step toward restoring investor confidence. Foreign institutional investors had been pulling money from Indian assets, but the deal could reverse this trend.

The trade developments are described as "immensely positive for every Indian asset class," according to Garima Kapoor of Elara Capital. While the full removal of tariffs has not yet occurred, the reduction is expected to boost investor sentiment and support the rupee's recovery.

Why Did This Happen?

The trade deal was announced after Prime Minister Modi committed to a $500 billion purchase of U.S. goods, including energy, technology, and agricultural products. The agreement removes a 25% duty on Indian goods imposed earlier in response to India's purchases of Russian oil. Trump described the deal as a "Trade Deal" between the United States and India and emphasized the importance of the bilateral relationship.

India's decision to shift away from Russian oil imports was a key factor in the U.S. decision to reduce tariffs. The move is also seen as a strategic effort to support the U.S. and its global interests, particularly in the context of the Russia-Ukraine war.

How Did Markets React?

The market reaction to the deal has been positive, though it remains to be seen whether the gains are sustainable. Equity benchmarks had seen significant declines in the previous month due to uncertainty over the trade dispute. The rupee, which had reached record lows, is expected to strengthen as the trade tensions ease.

Sonam Srivastava of Wright Research PMS noted that the deal is a "meaningful positive" for Indian equities, particularly for export-oriented sectors such as IT services, pharmaceuticals, and engineering goods. However, she emphasized that the long-term impact will depend on how well the sectors adapt and whether earnings improve.

What Are Analysts Watching Next?

Deepak Agrawal of Kotak Mahindra Asset Management highlighted the potential for improved balance of payments and increased foreign exchange reserves as a result of the deal. These factors are expected to attract foreign institutional investors and support the rupee's recovery.

The gems and jewellery sector, among others, is also expected to benefit from the trade deal. India is a major exporter of processed seafood and textiles, and the tariff reduction is expected to make these sectors more competitive in the U.S. market.

Analysts are also watching for clarity on how the new tariff rate will apply to specific sectors, such as automobile components. While some sectors are already seeing benefits, others are still awaiting detailed guidance.

The deal is part of a broader effort to modernize India's trade infrastructure and improve its competitiveness. The Union Budget 2026-27 has also introduced measures aimed at streamlining customs procedures and reducing input costs for key industries.

India's trade relationship with the U.S. is now more defined, but challenges remain. The country is also pursuing trade deals with other partners, including the EU, as part of a strategy to diversify its export markets and reduce dependency on any single economy.

The economic survey for the 2026-27 fiscal year projected growth in the range of 6.8% to 7.2%, with reforms and policy stability expected to support this trajectory. The resolution of trade tensions is seen as a key factor in achieving the upper end of this growth projection.

Investors are now closely watching whether the positive sentiment translates into long-term capital inflows and economic growth. While the immediate outlook is optimistic, the sustainability of the gains will depend on how well the domestic economy responds to the new trade environment.