The recent U.S.-India trade deal may have dispelled concerns about the undervalued Indian rupee. The deal was probably enough to pause relentless foreign selling in stocks. However, investors say that earnings growth may rebound and fundamentals improve for sustained buying.
The long-awaited deal sparked an upsurge in the stock market. The rupee’s best rally in 7 years was on Tuesday, 3 February, as it signaled improving diplomatic and trade relations with the U.S.
However, this was just one of the factors that was hanging over the currency and stock markets. They have underperformed regional and global peers by a wide margin. This phenomenon has been the case since the commencement of last year. It has witnessed foreign allocations dwindle to a two-decade low.
Although nearing record peaks, Indian equities tend to be vulnerable to disruption from artificial intelligence (AI). Without any sector companies, they have been left behind in the race towards AI.
Details of the trade deal remain sparse. Companies appear hesitant to plan for investments in capital spending.
Head of global emerging markets for equities at M&G Investments, Michael Bourke cited that he was not convinced that tariffs have an immediate impact. He added that although they may feed into sentiment, he added that that is probably the best way to think of it.
Bourke opined that just because tariffs had decreased, one cannot suddenly witness an earnings surge. He expressed his skepticism about drawing such a conclusion.
The deal was meaningful to markets. However, Naomi Waistell, a fund manager in the emerging equities team at Carmignac, which manages USD 48.5 billion in assets, stated that the deal is meaningful primarily for sentiment and valuation rather than for near-term earnings uplift.
Waistell went on to add that the deal does not resolve some of the recent issues surrounding Indian equities. These may move with still elevated valuations and relatively lower forward earnings growth versus EM peers. There is a lack of globally scalable AI-beneficiary businesses.
Foreign investors have raked in nearly USD 23 billion out of Indian stocks since the beginning of 2025. More recently, they poured in USD 580 million on Tuesday, 3 February 2026.
Head of India fixed income, currencies, and commodities trading at Bank of America in Mumbai, Vikas Jain, was optimistic, saying that there should be some revival in the near term for foreign investor flows.
Jain opined that the underweight investors may come to an immediate neutral position. He added that going overweight may depend on growth revival and the kind of policies that the government may announce.
Analysts and traders believed that the deal may also offer respite to India’s battered currency.
The rupee has been the worst-performing Asian currency during the last 12 months. It required the central bank to consistently defend its value as it slid from a previous 88 for each dollar to decline to a record low of 92 in January 2026.
The heightened appetite of firms to hedge against rupee weakness, along with the central bank’s inclination to bolster foreign exchange (FX) reserves, are among the many factors that traders believe may hinder an extended rally in the currency.
Tariffs on Indian goods had created a balance-of-payments risk for India. This contributed to the Indian rupee (INR) depreciation. The trade deal breaks this loop. It encourages foreign investors to evaluate Indian equities more objectively. These sentiments were shared by a California-based portfolio manager at Matthews Asia, Peeyush Mittal.
India’s benchmark index has risen by a respectable 10% during the last 12 months. However, it is insignificant compared to the 118% surge in South Korea and the 42% gain in Taiwan’s stocks over the same period.
