US trade deal: Dalal Street roars as ‘geopolitical discount’ fades

Stock markets broke into a cheer on Tuesday as news of the India-US trade deal lifted a cloud of uncertainty, with the benchmark indices clocking their best gain in eight months.

The Nifty soared at 5% at opening, before ceding some gains to close 2.6% higher at 25,727.55. Meanwhile, the Sensex closed up 2.5% at 83,739.13. The market capitalization of BSE-listed companies surged by ₹12.06 trillion.

Negotiations around the deal have been anything but smooth. While the fine print still matters, its conclusion lifts uncertainty over the rupee, equities, and bond markets, bringing a degree of certainty that investors had been waiting for. The conclusion of the deal has rekindled hopes that foreign institutional investors (FIIs), net sellers for most of 2025, could finally return.

The Nifty Midcap 100 jumped 2.8% and the Nifty Smallcap 250 rose 2.9%, with both notching their biggest single-day gains in eight months. Among the sectoral indices, Nifty Realty and Nifty Chemicals were the best performers, rising 4.8% and 3.8% respectively.

The rupee staged a sharp relief rally, rising 1.4% or 124 paise to close at 90.2725 against the dollar. Earlier in the day, the rupee hit its highest level at 90.0500 since 14 January.

“We see USD-INR (dollar-rupee) reversing direction and moving towards 88.5-89 in the upcoming weeks with the FPI flows reversing course,” Elara Capital said in a 3 February note.

The brokerage believes that even though valuation concerns persist versus peers and the hangover of AI trade remains, “we don’t rule out the Indian equities becoming the best performers in Asia in the upcoming weeks”.

India’s valuation premium has cooled significantly from its 2024 peak, even as other emerging markets have mounted a strong comeback. While solid economic momentum, consistent policy signals, and resilient earnings had long justified the premium, that buffer has steadily eroded over the past year.

Sujan Hajra, chief economist & executive director at Anand Rathi Group, said India’s equity underperformance over the past year can be partly explained by sustained FII outflows—driven not by weak fundamentals, but by rising geopolitical and policy uncertainty around India–US trade ties. For global investors, strained relations translated into higher risk premia, currency concerns, and capital flight, even as domestic earnings remained resilient.

With the India-US deal now in place, that overhang is starting to lift, he said. Hajra noted that the real shift isn’t just incremental tariff relief, but the return of geopolitical and trade stability.

“As risk premia normalize, India once again looks investable to global capital - a high-growth, politically aligned, strategically important economy with deep domestic demand and improving external linkages to both the US and Europe.”

In that sense, Indian equities had been carrying a geopolitical discount that is now fading. The case for a catch-up rally, he said, rests less on near-term earnings upgrades and more on a reversal of the capital-market pessimism triggered by earlier tariff shocks and diplomatic friction.

Deepak Agrawal, CIO -debt, Kotak Mutual Fund, said, “This development is likely to…attract foreign institutional investors (FIIs) who had been waiting on the sidelines.”

As part of the India-US trade deal, Washington will cut its reciprocal tariff on Indian goods from 25% to 18%, while India will lower its tariffs and non-tariff barriers on US imports to zero, US President Donald Trump said. The US will also roll back the additional 25% duty imposed on Indian goods over India’s purchases of Russian crude, reports said.

“For equity markets, the deal enhances earnings visibility, supports valuation re-rating - particularly for export-oriented and capex-linked sectors-and reinforces India's positioning as a relatively safe haven among emerging markets,” an Axis Securities note said.

This move is expected to benefit a narrow set of sectors: (i) chemicals - SRF, Navin Fluorine, Gujarat Fluorochemicals, Aarti Industries and Atul; (ii) textiles - Gokaldas Exports and Welspun Living; and (iii) auto ancillaries - Suprajit Engineering, Bharat Forge and Sona Comstar, according to a late-night note by Emkay Global Financial Services.

The report also cautioned that oil marketing companies and Reliance Industries could face downside risks if India halts purchases of Russian crude.

The big picture

Beyond the boost from the India–US trade deal, Dhiraj Relli, MD & CEO of HDFC Securities, said the pick of Kevin Warsh to lead the US Federal Reserve signals a potentially more hawkish, less liquidity-friendly policy stance.

If the Fed signals rates will stay higher for longer or pivots less dovishly, that could strengthen the dollar and keep pressure on risk assets, he feels.

“Any surprises on rate policy or leadership output (e.g., new Fed Chair messaging) can swing markets sharply,” Relli said.

Attention is gradually expected to return to the domestic earnings season and corporate commentary. While results have been mixed so far, forward guidance and management's outlook will be key drivers, some market participants said.

At the same time, sharp volatility in commodities, particularly gold and silver, has spilt over into other assets, including equities. A stabilisation in precious metal prices could help temper broader market volatility, they added.