Foreign outflows from India will reverse only when potential gains for India from its trade pact with the US become clear, according to money managers, even as the joint statement is likely to lift market sentiment.
For now, markets will get a boost from short-covering by foreign portfolio investors (FPIs) on derivatives and some cash buying seen so far this month, they said. Overseas investors have net purchased Indian equities worth ₹5,908 crore since the trade pact was announced on 2 February, after three months of selling worth ₹62,338 crore, according to data from the National Securities Depository Ltd.
"The markets have discounted the positive news, but the needle for reversal for FPI outflow will move only after the finer points of the deal are analysed," said Nilesh Shah, managing director of Kotak Mahindra Asset Management Company. Until then, he adds that a “sentimental boost " is possible.
The GIFT Nifty, trading up 0.68% on Saturday, suggests a 180-point gap-up opening on Monday. The final framework for the trade deal is expected to be out later this week. Whether Nifty sustains above the 26000-mark will depend on how markets perceive the benefits of the deal, alongside factors such as rupee stability and earnings growth.
"A sentimental boost is quite likely, given the issuance of a joint statement by both sides," said Ashish Gupta, chief investment officer at Axis Mutual Fund. But the reversal of FPI outflows will also be contingent on factors such as a stable currency and improved earnings growth, he said.
The rupee has depreciated 0.87% in the year through Friday, according to Bloomberg data. However, it recovered from the record low of ₹91.99 hit on 30 January 30 to ₹90.66 on Friday. A weaker rupee eats into FPIs' dollar returns.
The Nifty 50 index plunged from its earlier peak of 26277.35 on 27 September 2024 to a 52-week low of 21743.65 on 7 April 2025 due to FPI selling. Since then, it has recovered to 25693.7 on Friday. The index hit a record high of 26,373.20 on 5 January.
“Overall, the trade deal removes some uncertainty, and markets may take that positively. However, markets will be looking for earnings cues to sustain,” said Chirag Mehta, chief investment officer at Quantum Mutual Fund. If earnings growth picks up, markets can move decisively higher, Mehta said.
“Earnings will depend on how effectively companies execute on new orders and translate improved market access into actual deliveries. Lower tariffs create opportunity, but sustained earnings growth will come only if firms convert that into timely execution and capacity expansion,” Mehta said.
Net sales of the Nifty companies that have reported earnings so far have grown 6.23% year-on-year in the October-December quarter, up from 4.31% in the July-September period.
The sustainability in the Nifty 50 index looks more likely as the Indian market has already undergone a time correction of around 15–16 months, mid- and small-cap stocks have corrected, and valuation concerns in large-caps are gradually easing, said Rajesh Palviya, senior vice president and head of technical and derivatives research at Axis Securities.
Index shorts to offer cues
After Donald Trump’s victory in the 2024 election for a second term, FPIs turned negative on emerging markets like India due to concerns about tariffs. Overseas investors sold in the cash market and the derivatives segment. Some hedge their cash market portfolios through index and stock futures and options, while others simply punt based on their perception.
Net short index futures rose to a record 203,219 contracts on 1 February when the Union Budget for FY27 was announced. Since then, the positions have dropped to 150,250 contracts and, along with cash buying, enabled Nifty to bounce 4.6% from the low of 24572 to Friday's closing of 25693.7.
Whether the bearish bets will be closed out will depend on what the Street makes of the fine print and its impact on the earnings of companies with exposure to US markets, as well as on rupee movement, according to experts.
Of FPIs' total index futures open positions of 237,174 contracts, Nifty accounted for 77%, Bank Nifty 14%, and Nifty Midcap Select 9%.
Specific industries that stand to benefit will be pharma, gems and jewellery, technology and digital infrastructure, aviation and automotive parts, and manufacturing and textiles, according to Akshay Chinchalkar, managing partner and head of markets strategy at The Wealth Company.
Mehta of Quantum said that auto components stand out as a key beneficiary, especially if quotas are structured well and India gets preferential tariffs of around 18%, opening up a large export opportunity. Specialty chemicals and select manufacturing and industrial sectors could also see meaningful gains from improved market access, he said.
Joint statement
The joint statement released on 7 February said India will reduce or eliminate tariffs on certain US food and agricultural products such as dried distillers’ grains, red sorghum for animal feed, tree nuts, fresh and processed fruits, soybean oil, as well as wine and spirits.
The impact of tariff reductions on Indian agriculture is expected to be limited, as US agricultural products are generally priced higher than domestic produce, said A. Balasubramanian, managing director and chief executive officer for Aditya Birla Sun Life Asset Management Co.
Indian consumers also predominantly rely on domestically sourced goods, with imports gaining traction only when competitively priced, and even with a tariff cut, these products may still be more expensive than domestic ones, he said.
The US will impose tariffs on Indian textiles and apparel, leather and footwear, plastic and rubber goods, organic chemicals, home décor, artisanal products, and certain types of machinery. However, these tariffs can be rolled back with further discussions, the statement said.
India plans to purchase $500 billion worth of US energy products, aircraft and aircraft parts, precious metals, technology products, and coking coal over the next five years, it said.