Why is Indian stock market not witnessing a sharp rally despite India-EU free trade agreement? Explained

The Indian stock market benchmarks- the Sensex and the Nifty 50- extended gains for the second consecutive session on Wednesday, January 28, as the India-EU free trade agreement influenced sentiment. However, the trade deal, being hailed as the "mother of all trade deals", has failed to trigger a sharp trend reversal in the domestic market.

Equity benchmark Sensex jumped over 600 points, or nearly 0.80%, in morning deals on Wednesday but soon pared most of its gains to drift to an intraday low of 81,887.93, just 30 points above its previous close of 81,857.48. Similarly, the NSE counterpart, the Nifty 50, also rose by 0.80% in the morning session but soon slipped to an intraday low of 25,225.70, just 0.20% above its previous close of 25,175.40.

India-EU FTA: Why has the deal booster failed to charge up bulls?

While the India-EU free trade agreement has underpinned market sentiment, it has not sparked aggressive buying in the domestic market.

“The deal is positive for India. Indian exports will get very competitive. However, it will take months for the deal to go live. Much will depend on execution," P. Krishnan, MD and CIO, Spark Asset Management, noted.

"This deal got expedited as both sides wanted some risk mitigation to counter the chaos being churned out by the US. As for markets, this lifts sentiments. This is not a game changer for the market nor does it lead to earnings upgrades on its own,” Krishnan said.

One of the biggest reasons is that the market had already discounted this deal to a large extent, given the signals from Davos following US President Donald Trump's aggression against European countries over Greenland.

The India-EU FTA (free trade agreement) is a long-term positive for India's trade and economy, but not an immediate trigger for the market, which is facing he heat of relentless FII selling, unimpressive earnings, and geopolitical uncertainties.

"The India-EU trade deal is a huge positive, but it was largely discounted by the markets. Markets respond only when something unexpected happens. This was already expected. That is why it has not boosted market sentiment as expected by many," said VK Vijayakumar, Chief Investment Strategist, Geojit Investments.

India-US trade deal remains a critical factor

The India-EU FTA does not have an immediate, direct impact on the major factors, such as FII selling, US tariffs, weak earnings, and currency fluctuations, behind the domestic market's weakness over the last several months.

Market participants also acknowledge that the India-EU FTA cannot offset the impact of an India-US trade deal.

"Of course, India-EU FTA is a big deal, but then it is important to understand that this is not a substitute for the India-US trade deal. The US remains India’s largest single-country export market and its biggest bilateral trade surplus partner. We have a $41 billion trade surplus with the US and only $15 billion surplus with the EU. So, the India-US trade deal is more important," Vijayakumar explained.

Pankaj Pandey, the head of research at ICICI Securities, said the market is slowly digesting the India-EU trade deal, while awaiting further details.

"I think we need furthermore details to sort of come out on his India-EU trade deal. So, while yes, it is positive, but the market is looking for some near-term opportunity to sort of come back," said Pandey.

Focus on the Budget

The domestic market has not seen much of a run-up to the budget kind of rally this year. The limited gains in the market could be because of some short covering.

"The short positions on F&O are significantly higher. So, ahead of the budget, no one would want to carry such a high short position. Therefore, some bit of short covering is what we are sort of sensing," Pandey said.

The market is not carrying any major expectations from the Budget. However, major policy reforms and positive surprises on the taxes front can lift market sentiment.

"From the Budget, there is no major expectation that the market is carrying at this point in time. But a few things can still sort of perk up the market. If something happens on the housing front, especially affordable housing, that can be a positive," said Pandey.

"Any taxation relief to FPIs can really sort of change the sentiment. Till the time it does not come, the market is not going to sort of factor in the Budget beforehand," said Pandey.

Earnings remain a top trigger

Amid all the global noise and chatter around the Budget, earnings remain the most important factor for the market. Strong earnings growth can bring back FIIs, improving market sentiment significantly.

Q3 results of Indian corporates have been mixed so far. There are some green signals, but they are being eclipsed by concerns that the Indian rupee's weakness and US tariff-led uncertainties could dent the prospects of healthy corporate profitability.

Read all market-related news here

Read more stories by Nishant Kumar

Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.