Markets to remain firm on conclusion of India-US trade deal

Last week, equity markets traded with a positive bias, supported by selective buying

Indian equity markets are expected to open the week on a firmer note, as macro sentiment improves following the announcement of the long-awaited Indo–US trade deal, coming soon after the conclusion of the Indo–EU Free Trade Agreement. While volatility may persist around key global macro data releases and US Federal Reserve commentary, the broader tone for domestic markets has turned more constructive, aided by easing trade-related uncertainty and improving risk appetite across equities, currency and capital flows. With the Q3 earnings season approaching its conclusion, stock-specific movements are likely to remain in focus, with results awaited from companies such as BSE, SBI and Grasim, among others. Key events to watch this week include important US economic data and FOMC member, Fed Waller speaks, India’s WPI inflation data for January—covering food, fuel and manufacturing components—and trends in equity market flows.

Last week, equity markets traded with a positive bias, supported by improved global sentiment and selective buying. Benchmark indices ended higher, with the Sensex gaining 1.5% and the Nifty50 rising 1.4%. Broader markets also saw healthier participation, as the Nifty Midcap100 advanced 1.8%, while the Nifty Smallcap100 gained 1.0%, indicating a gradual improvement in risk appetite among investors.

Among sectoral indices, IT and PSU Bank were the top laggards, declining 8.0% and 2.3% respectively. IT stocks underperformed as global technology sentiment weakened following earnings-related concerns around AI-driven disruption to traditional software and services revenues, alongside cautious guidance from global technology research firms. Metal stocks also ended lower, down 1.5%, amid a correction in non-ferrous and precious metal prices. In contrast, cyclical and rate-sensitive sectors outperformed, led by Realty and Energy, which gained 7.1% and 5.1% respectively, followed by Infrastructure, which rose 5.1% on expectations of stable interest rates, strong domestic demand and sustained government capital expenditure. Auto stocks advanced 2.9%, supported by resilient demand, improving rural sentiment and stable input costs. Media and private banks gained 2.3% and 1.8% respectively, while Financial Services, Pharma, Bank and FMCG indices posted gains of around 1%, reflecting broader but still selective participation across sectors.

On the earnings front, the results from companies accounting for nearly two-thirds of Nifty profits show earnings growth of about 7% year-on-year, broadly in line with expectations, led by strength in metals, oil and gas, automobiles, technology and BFSI.

The Indo–US trade deal announcement marks a significant inflection point for India’s external sector and equity markets. Composite tariffs on Indian goods exported to the US have been sharply reduced from around 50% to about 18%, with punitive levies fully rolled back. This shifts India from being one of the most tariff-disadvantaged exporters to among the more competitive suppliers in the US market, providing a relative advantage over peers such as China, Vietnam, Brazil, Thailand and South Africa.

The timing of the announcement—earlier than widely anticipated—has provided a meaningful boost to market sentiment, particularly after a prolonged phase of foreign investor outflows, currency weakness and emerging market underperformance. Beyond the near-term reaction, the easing of trade uncertainty is expected to support capital flows, improve export visibility and strengthen investor confidence. Strategically, the Indo–US agreement, alongside the Indo–EU FTA and earlier trade pacts with the UK, EFTA and New Zealand, reinforces India’s positioning in an increasingly bilateral global trade environment.

Export-oriented sectors are expected to be key beneficiaries of the improved trade outlook. Auto ancillaries, textiles, electronics manufacturing services, consumer goods, defence manufacturing and IT services are likely to gain from higher export volumes, improved market access and operating leverage. Financials and utilities may benefit indirectly as export-led growth supports credit demand and broader economic activity.

India’s textile sector appears to be at a turning point. With the US accounting for nearly 30% of India’s textile exports, the reduction in tariffs has materially improved competitiveness across segments such as home textiles, man-made fibre products, cotton blends and technical textiles. Combined with ongoing capacity additions and a nascent investment cycle, textile exports are projected to rise from around $36 billion to $45–50 billion over the next three years.

Market sentiment has also been shaped by the Union Budget for FY2026–27, which broadly stayed the course on fiscal discipline. The government retained a realistic nominal GDP growth assumption of around 10% and projected a marginal reduction in the fiscal deficit to 4.3% of GDP from 4.4% in FY26 (revised estimate). While higher-than-expected gross market borrowing of Rs 17.2 lakh crore raised some concerns, the budget maintained its focus on capital expenditure, with outlays of Rs 12.2 lakh crore for FY27, particularly in defence, railways, roads and infrastructure.

On the monetary policy front, the Reserve Bank of India’s Monetary Policy Committee held its first policy review of 2026 last week, keeping the repo rate unchanged at 5.25% and retaining a neutral stance. The central bank highlighted the need to balance moderating inflation trends with global uncertainties, while noting that recent trade agreements have supported the near-term outlook for growth.

Commodity markets also saw some cooling off, with gold and silver prices correcting as a stronger US dollar and softer broader market sentiment prompted investors to trim exposure to precious metals. Domestically, India’s WPI inflation data and trends in equity market flows will be closely watched for cues on inflation and sentiment, while globally, attention will shift to upcoming US economic data and commentary from Federal Reserve officials.

(The writer is Head of Research, Wealth Management, Motilal Oswal Financial Services Ltd)