ABP Live Deep Dive | India-US Trade Deal: Tariff Cuts, Market Cheer & A Strategic Reset

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In a significant step forward in the strategic economic partnership between India and US, the two largest democracies have steered a constructive and forward-looking dialogue and finalised a long battled trade agreement-following months of negotiation by Commerce and Industry Minister and his team-reducing US tariffs on India from 50 per cent to 18 per cent, which broadly, as voices from industry, rating firms, exporters and markets assure, will enhance global competitiveness of Indian products while catalysing manufacturing growth, employment creation and development of resilient supply chains.

The deal no doubt has come as a positive surprise, with pervasively very low expectations that any US trade deal would be announced, according to Nomura analysts Sonal Varma and Aurodeep Nandi who see the US announcement of a deal with India following India’s move to halt Russian oil imports, cut tariff and non-tariff barriers against the US to zero and commit to buy USD 500 billion of American goods.

“The US would reduce tariffs on India from 50 per cent to 18 per cent, effective immediately, which includes a reduction in the reciprocal tariff from 25 per cent to 18 per cent and a lifting of the 25 per cent penalty imposed on India’s purchase of Russian oil. Ajay Srivastava, founder, Global Trade Research Institute, also highlights Trump’s claim that India committed to “buy American” at much higher levels, including purchases of more than USD 500 billion worth of US energy, technology, agricultural products, coal, and other goods. (See Fig 1)

Deal Timing Puts India In A Commanding Place

Taking a pragmatic line, Chandrajit Banerjee, Director General, CII sees it as “historic trade and tariff giant steps” which has resulted in a more balanced and predictable trade framework between India and the United States. “The tariff rationalisations positions our two nations as strong partners committed towards economic progress and would strengthen bilateral trade, investments and growth across manufacturing, technology and certainly enhance job creation in our nations,” says Banerjee.

Nirmal K Minda President ASSOCHAM is optimistic on the potential of bilateral trade between India and the US reaching USD 500 billion in the next five years with India achieving a major breakthrough in its trade relations with the US on the back of the tariff rate cuts by US on Indian exports to 18 per cent. “This historic step is set to boost the India-US trade trajectory to its next leap and reflects India’s growing role in shaping a new world trade order,” says Minda.

Agrees President of FIEO SC Ralhan “This agreement sends a strong signal to global markets about India’s commitment to free, fair, and rules-based trade. We are confident that this development will help India achieve its long-term export targets and further strengthen India’s position as a reliable global trading partner,” says Ralhan.

Banerjee agrees that this agreement is not just about tariffs, but also about certainty for investors, as it enhances supply chains’ resilience and lays the foundation for deeper collaboration. “India’s recent forays over the last few years, months in enhancing global economic and strategic connects shows the prowess of our trade and Industrial policy frameworks,” observes the CII DG. Anant Goenka, President, FICCI looks forward to a significant reset in India-US economic ties which will benefit sectors such as apparel, leather, gems and jewellery and marine products, strengthen business confidence and deepen bilateral economic engagement.

Of course, as Goenka emphasises, it is contingent on being implemented effectively and if done so, can provide a meaningful boost to India’s export growth trajectory and broaden market access. (See Fig 2)

Nandi and Varma focus on the timing of the US deal which strategically follows India’s “mother of all deals” with the EU last week. India is also discussing energy purchases from Canada. “The EU and US are competitors across many products and the EU’s first mover advantage in India’s market in segments like autos, for instance, has likely exerted some pressure on the US to sign a deal.

Even as the power balance tilts towards the US, India also has a large consumer market, is domestic-demand driven and provides opportunities for US in defence and energy sectors,” say Sonal Varma and Aurodeep Nandi. The deal also comes amidst India’s moderating oil imports from Russia over the last month, mainly due to US sanctions on the two Russian firms, Lukoil and Rosneft. As a result, India has been looking to diversify its oil import sources. (See Fig 3)

The timing of the trade agreement also coincides with the growing trade engagement between India and the US. “The reduction of the US tariff rate on most Indian goods will reinvigorate India’s goods export growth to the US, which remains the country’s largest goods export market, accounting for about 21 per cent of India’s total goods exports for the first 11 months of 2025,” says a Moody Ratings report. In all, US tariff reduction to 18 per cent from 50 per cent is a major sentiment booster, agree Nomura economists.

The sentiment is riding high among industry stakeholders and exporters given the overall and all comprehensive impact of the tariff reduction which will allow the US effective tariff rate on India to fall to 14.6 per cent from the prior 33.6 per cent. “Indian exporters will now operate on par with competitors in Southeast Asia, and some trade diversion back to India is expected,” say Varma and Nandi. India will likely reduce tariffs on most imports from the US to zero, opening its markets to US firms. According to the USTR Factsheet, India’s average applied tariff (on the US) was 17 per cent. “We expect India’s offer on tariffs to mimic its offer to the EU,” add Varma and Nandi.

Road Ahead

Going ahead, the economists also predict, lower non-tariff barriers. India and the US have been negotiating on technical barriers to trade, regulatory barriers, and restrictions on market access in the services, industrial and agricultural sectors. Nomura expects some of the barriers to be eased. India could offer to align its sanitary and phytosanitary measures more closely to international norms to enable the import of US agricultural products.

India could also align its quality control order to reduce the need for testing and certification of US goods entering Indian markets. Lastly, it could streamline the regulatory approval process to facilitate easier entry for US pharmaceutical products and medical devices. Similar to US deal with Malaysia and other Asian countries, India may offer purchase commitments that include annual purchases of US LNG, coal, telecommunication products and services, semiconductors, aerospace components, data center equipment, coal, and Boeing aircraft over the next five years.

 “It is unlikely that India would have opened up its sensitive markets like agriculture (particularly on exposure to genetically modified seeds), dairy and lower-end autos,” say Varma and Nandi. So far, around a third of US imports from India were out of the scope of tariffs (like electronics, pharmaceuticals and mineral oils), over 9 per cent of the goods remain under Section 232 tariffs (25 per cent for autos and auto parts and 50 per cent for metals) and the remaining close to 60 per cent were under the 50 per cent tariff coverage, which now will enjoy lower tariffs.

The reduction in tariffs to 18 per cent is thus a significant change that will reduce margin pressure on labour-intensive export segments. With this deal, Indian exporters are now at par with competitors in Southeast Asia and the trade in products such as toys and furniture that was previously being diverted to countries like Vietnam should now flow back to India.

Gains For Textiles, Engineering

The India-US trade agreement has far reaching positive implications for a wide range of sectors. Chairman, Apparel Export Promotion Council A Sakthivel, calls the India–US pact a breakthrough. “This is a highly welcome and timely development for the Indian apparel industry which was stressed due to the high US tariff of 50 per cent. The US is our single largest export market and improved trade terms will significantly enhance the competitiveness of Indian apparel products in the US market,” says Sakthivel.

The development is expected to give a strong boost to apparel exports, attract fresh investments across the value chain, and reinforce India’s position as a reliable global sourcing hub. “Recent US actions imposing 25 per cent tariffs and an additional 25 per cent oil-related penalty on imports are causing severe disruption to India’s textile exports, particularly to the US-India’s largest single export market.

Without immediate resolution, the sector faces order stoppages, job losses, and permanent loss of market share. The US market accounts for 70 per cent of exports for several large Indian textile exporters. Textile exports operate on thin margins, leaving no capacity to absorb prolonged tariff shocks,” says the AEPC chairman.

Importantly, as Ralhan, points out, the trade deal could be a game-changer for Indian exporters as it would enhance the competitiveness of Indian products in the US market and provide a strong impetus to India’s export growth across sectors, a long and much desired objective for industry. At 18 per cent, India now enjoys a lower tariff rate than key competitors such as Bangladesh, Vietnam, Sri Lanka, Taiwan, Pakistan, Indonesia, Malaysia, and Thailand. Even major exporters like Canada and South Africa face higher duties, placing India in a relatively advantageous position, says ASSOCHAM’s Minda.

The duty rate cut is expected to lead to an immediate and substantial release of orders that were earlier put on hold, particularly in apparel, textiles, leather and footwear, where global buyers typically lock in summer season sourcing by December. With sharper price parity, improved tariff certainty, and strong buyer confidence in Indian suppliers, these sectors are poised for a rapid surge in orders and a strong acceleration in export growth in the coming months.

“Lower tariffs will not only improve price competitiveness but also help Indian exporters integrate more deeply into US supply chains. This agreement will encourage capacity expansion, attract fresh investments and support job creation in export-oriented industries,” Ralhan adds.

For Pankaj Chadha, Chairman, Engineering Export Promotion Council, the deal brings much-needed relief for the engineering exports sector. The trade deal helps Indian engineering exports regain their competitiveness in the US market, which is the top destination for our shipments.  Many US-based buyers who had either cut or slowed their orders because of the high tariff will find Indian goods affordable again.

The reduced tariff will benefit most major engineering categories where India already has a strong footprint. Engineering goods exporters, especially MSMEs, are expected to benefit significantly from it as they were the worst affected by the steep 50 per cent duty,” says Chadha.

Despite the high tariffs, India’s engineering exports to the US reached USD 14.68 billion in the April-December period of 2025‑26, showing around 5 per cent growth. The new tariff cut should help push this growth even further. Products such as machinery, machinery parts, pumps, compressors, electrical equipment, auto components, steel and aluminium items, industrial valves, and boilers will all gain a clear advantage in the US market as a result of lower tariffs.

 Markets Cheer Deal

Even Indian markets have something to rejoice. The absence of a US trade deal had created significant headwinds for India’s capital markets, with foreign portfolio investment (FPI) outflows and foreign direct investment (FDI) commitments in wait-and-see mode from US market-focused firms.

Despite India running a relatively small current account deficit, it has faced a challenge with low capital inflows. This effect from this capital flow constraint has cascaded across financial markets, weighing heavily on both the currency and equity market performance. The pressure has also spilled over into the bond market, as RBI interventions to support the currency have drained durable liquidity from the system, creating additional market stress.

“The significance of the US trade deal lies in serving as a powerful catalyst for shifting investor sentiment towards India following a particularly weak 2025. With a cyclical growth recovery on the cards (more below), and the removal of the US tariff uncertainty, we expect FPI flows, and importantly, FDI commitments into India to gradually reverse. After a weak FY26, we are projecting a balance of payments surplus of USD7 billion in FY27,” say Nomura’s Varma and Nandi.

According to Jigar Trivedi, Senior Research Analyst at Indusind Securities, the Rupee is set to rally on prospects India-US trade deal to attract flows. The Indian rupee opened sharply around 90.50 per dollar supported by expectations that the US–India trade deal will draw foreign investors back to Indian assets and alleviate hedging activity-related pressure. By removing penalties linked to India’s purchase of Russian energy and slashing reciprocal tariffs to 18 per cent, the agreement is expected to encourage a return of foreign capital after record equity outflows in 2025 left the rupee under sustained pressure.

“The trade deal removes a chunk of policy and tariff uncertainty that had been weighing on Indian assets, opening the door for a near-term bounce in the rupee and equities via sentiment and foreign flows. The rupee was the worst-performing Asian currency in 2025, down nearly 5% for the year and more than 2% last month. The trade deal is expected to break a self-reinforcing cycle of hedging that has weighed on the rupee,” observes Trivedi.

Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Group who pins the underperformance of Indian equities over the past year, in part, to large and persistent foreign portfolio investor (FPI) outflows, notes that these flows were not driven by corporate fundamentals-which have remained robust -but by rising geopolitical and policy uncertainty around India’s trade relationship with the US.

“For global investors, deteriorating India-US relations translated into higher perceived risk premia, currency uncertainty and capital flight, even as domestic earnings held up. With the India-US treaty now in place, that overhang is beginning to lift. The key shift is not incremental tariff relief, but the restoration of geopolitical and trade stability.

As risk premia normalise, 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.

(Mukherjee is a contributing writer for ABP Live English. A business journalist for more than 15 years, she has written extensively on the economy, policy, and international relations in Indian newspapers and magazines)