The US and India have finalized a trade agreement that lowers tariffs on Indian goods from 25% to 18%. This deal hinges on India’s continued reduction of oil imports from Russia and is expected to boost India’s exports and financial markets.
The agreement improves India’s trade position compared to China and aligns its tariffs more closely with ASEAN countries. In the fiscal year 2025, India exported $86.5 billion to the US while importing $46 billion, which accounted for 6.7% of total imports.
Positive Economic Impact
This tariff change is seen as a positive step for India’s economy, exports, and market outlook. More details about the trade agreement are awaited.
The unexpected tariff cut from the US is a pleasant surprise for our markets. We expect the Nifty 50 to open strongly, leading to a relief rally that may counter the negative sentiment that grew at the end of January 2026. This rally is especially significant since the Nifty had dropped nearly 8% from its November 2025 highs due to worries about halted trade talks.
Implied volatility is likely to rise at market opening but should decrease in the following weeks as stability returns. The India VIX index, which closed nervously at 16 last week, might decline to the 12-13 range if the rally continues. We should consider strategies that take advantage of this expected drop in volatility, like selling out-of-the-money put options after the initial market spike.
Currency and Sector Impact
The Indian Rupee is set to appreciate significantly against the US dollar. After recently testing a low of 85.50 against the dollar, we might see the USD/INR pair fall below key support levels around 84.00. Traders should look for chances to short USD/INR futures or buy Rupee call options to benefit from this strength.
We predict strong performance from export-driven sectors like textiles, auto components, and engineering goods. These sectors have faced challenges, as shown by recent data for the December 2025 quarter, which indicated a 2% year-on-year decline in merchandise exports to the US. Buying call options on top companies in these sectors seems appealing for the upcoming weeks.
Historically, the initial boost from such trade deals can create lasting momentum, similar to the rally following the US-Mexico-Canada Agreement (USMCA). However, we need to keep an eye on India’s oil purchases from Russia since the deal is tied to ongoing reductions. Any indication that India is not meeting its commitments could quickly bring back risk.
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