India's Market Fever: Trade Deal vs. AI Clash

A landmark U.S.-India trade pact slashed tariffs, igniting export hopes in textiles, gems, and machinery, propelling the Nifty toward 26,300, only for AI disruption fears to crush IT stocks and erase $50 billion in value. February's wild swings hide strong tailwinds: low inflation, steady RBI rates, and rising inflows. Is this the buy-the-dip moment for the next rally? Inside: key sectors, lurking risks, and smart money moves. [EasyDNNnews:PaidContentStart]

Most of you have found yourself closely monitoring the markets this February, navigating through the extremely volatile movements of the equity market; you are certainly not alone. This month has been a rollercoaster, with headlines alternating between highlighting opportunities and urging caution, leaving even experienced investors contemplating their next move. 

Even a seasoned investor who has been dissecting India's equity markets for over three decades through booms, busts, and everything in between, has seen their share of volatility. But this February feels different. It is a cocktail of genuine tailwinds from trade deals, nagging worries over tech disruptions, and a macro backdrop that is surprisingly steady. In this cover story, I will walk you through what is really driving the action, why the market is reacting the way it is, and, most importantly, what you, as an informed investor, should be considering right now. Let us dive in, shall we? 

Picture this: It is mid-February 2026, and the Indian equity market is like a high-stakes poker game where everyone is bluffing just a little. The Nifty 50 started the month with a bang after a disappointing Union Budget, surging toward 26,300 on the back of some blockbuster trade news. But by February 13, it had pulled back sharply, closing down 1.30 per cent at 25,471.10 in a single session. That drop was not isolated; the India VIX, our go-to gauge for market fear, spiked 13.36 per cent to 13.29 that day. If that sounds like whiplash, it was. Week-on-week, the Nifty only slipped about 0.87 per cent from 25,693.70 on February 6, but the journey felt far more brutal. Sectors were f lipping leadership like channels on a remote: one moment f inancials are holding the fort, the next IT is dragging everything down. 

What is fuelling this "all gas, no cruise control" vibe? Under the hood, it is a story of reassesSMEnt. The Nifty IT index tanked 8.2 per cent in that week alone, its worst performance in 10  months, and it is already down 13.7 per cent year-to-date. Why? Investors are finally grappling with the reality that India's IT giants, built on a "services plus headcount" model, might not be as bulletproof in an AI-driven world. Automation is not just a buzzword anymore; it is accelerating, and that is prompting a hard look at whether these companies can pivot fast enough. With IT weighing in at around 10-11 per cent of the Nifty 50, the spillover is real, collateral damage that is rippling through the broader index. 

his is not happening in a vacuum, either. Globally, there is a similar rotation away from overcrowded tech bets. Take the Nasdaq: it dipped about 2.03 per cent in the same week, underscoring this "AI valuation anxiety" that is crossing borders. Indian IT firms, many of which derive a huge chunk of revenue from U.S. clients, are feeling the heat as multiples compress. It is like the market is saying, 'We loved the growth story, but is it sustainable?' And honestly, after years of riding the digital transformation wave post-pandemic, this pullback feels like a necessary reality check. 

But let us not bury the lead here. The real spark that lit up February's early rally, and then added fuel to the volatility, was the U.S.-India trade agreement. This was not some vague memorandum; it was a policy bombshell that sent the Nifty soaring initially. Announced at the start of the month, it promised to slash tariff pressures on key Indian exports,  injecting a dose of optimism into a market hungry for structural wins. According to a Government of India backgrounder dated February 9, 2026, India's exports to the U.S. hit $86.35 billion in 2024. Under the deal, tariffs on $30.94 billion of those goods drop from 50 per cent to 18 per cent, while another $10.03 billion go tariff-free. Add in Section 232 commitments that zero out additional duties on $28.30 billion worth of products, and you have got a framework that is not just talk, it is quantified relief. 

From the U.S. perspective, this deal has a geopolitical flavour. Reports suggest it is tied to energy shifts: India agrees to phase out Russian oil purchases and ramp up buys from American sources, alongside commitments to import over $500 billion in U.S. energy, technology, and coal. Think about that for a second, it is a nod to the broader U.S. strategy of countering Russian influence while bolstering allies like India amid ongoing global tensions. For India, it is a win-win on paper: lower tariffs open doors to massive U.S. markets, and the energy pivot could stabilise supply chains in a world still reeling from post-Ukraine war disruptions. 

Sectors To Gain
Now, which sectors stand to gain the most? The backgrounder by government spells it out clearly, naming 'first-order winners' with eye-popping market sizes. Textiles and apparel: tariffs down to 18 per cent from 50 per cent, with silk getting zero duty access in a $113 billion U.S. market. Leather and footwear follow suit in a $42 billion arena. Gems and jewellery, India's sparkle export, see similar cuts, tapping into $61 billion plus an extra $29 billion in zero-duty categories. Home décor gets a boost in a $52 billion space, with $13 billion more at zero tariffs. And machinery parts? That is a whopping $477 billion U.S. market now more accessible at 18 per cent duties. These are not pie-in-the-sky figures; they are grounded in data, signalling a rules-based floor for India's export basket. No wonder the market initially cheered, it feels like derisking for manufacturing and export-heavy plays that have been battered by global trade wars. 

Of course, every silver lining has a cloud, and investors are not ignoring the fine print. That $500 billion import commitment from India raises eyebrows. It is not just about buying more U.S. goods; it is about execution. How quickly does this shift from Russian oil happen without spiking energy costs? What does it mean for India's current account deficit, especially if oil prices tick up? And on inflation pass-through, could higher import bills filter into consumer prices? These are the questions bubbling under the surface, turning what could be a pure bullish narrative into a balanced one. Markets love certainty, and right now, we are in a 'wait for the binding text' phase as legal vetting wraps up. If timelines slip or geopolitical hiccups arise, say, tensions in the Middle East flare again, the rally could f izzle. 

Macro Picture
Shifting gears to the macro picture, because no market story is complete without it. February's data has been a breath of fresh air, providing the oxygen for those trade tailwinds to catch fire. Start with inflation: On February 12, the Ministry of Statistics and Programme Implementation unveiled the first CPI print under a shiny new base year (2024=100). January's headline retail inflation clocked in at a provisional 2.75 per cent, with rural at 2.73 per cent and urban at 2.77 per cent. What is clever here is the revised basket, which trims food's weight to 36.8 per cent, down from higher levels in the old series. This tweak aims to iron out volatility from erratic food prices, better mirroring how Indians actually spend today (more on services, less on staples as incomes rise). It is a smart move, making the gauge more reliable for policymakers and investors alike. 

Enter the Reserve Bank of India, which in its February meeting kept the repo rate steady at 5.25 per cent and stuck to a neutral stance. Their FY26 growth projection? A robust 7.4 per cent, with average inflation around 2.1 per cent for the current year. What is telling is how RBI brass tied this comfort to the improving external environment, explicitly nodding to trade deals like the U.S. one as stability boosters. It is as if they are saying, 'We have got the tools to navigate this—trade is our ally now.' 

On currency and bonds, things are resilient but not without a depreciation bias. The rupee closed near-flat at around 90.6350 per USD on February 13, amid dollar demand that the RBI likely smoothed with interventions. It is holding up better than expected, thanks to those inflows we will talk about soon, but a weaker rupee could be on the cards if global dollar strength persists. Bonds? The 10-year benchmark yield edged to about 6.6878 per cent that day, with chatter about buybacks to manage supply. Short-term, expect yields in the 6.70-7.00 per cent range—stable, but watchful. 

Foreign Flows
Now, onto flows and positioning—because a market can weather sentiment dips if the money is flowing in. February's tale is one of layered inflows, turning what could be a shaky rally into something with real legs. Globally, emerging markets  are hot again. In the week ending February 13, EM Equity Funds pulled in $8.52 billion, per reports. This fits the rotation narrative—capital fleeing concentrated tech bets and diversifying into broader EM plays, including India. 

Zooming in on India, foreign portfolio investors (FPIs) have f lipped the script after months of selling. After enduring three consecutive months of relentless selling pressure that saw foreign institutional investors withdraw a staggering `1.66 lakh crore from Indian equities through calendar year 2025, February 2026 has marked a decisive inflection point in global investor sentiment toward India's domestic equity markets. 

FPIs have infused ₹11,641 crore into domestic stocks in February so far, representing a remarkable reversal from January's brutal ₹35,962 crore exodus. This turnaround appears to be driven by a confluence of favourable developments, most notably the signing of the Indo-U.S. trade deal which reduced tariffs on Indian exports to the U.S. from 50 per cent to 18 per cent, effectively addressing one of the key concerns that had weighed on foreign investor appetite. The rupee's stabilisation from its record lows, coupled with the Union Budget's commitment to fiscal discipline and the government's continued focus on infrastructure spending, has restored confidence in India's macroeconomic trajectory. 

Foreign institutional investors have injected over $2 billion into Indian equities in the nine trading sessions leading up to February 11, 2026, with particularly strong buying witnessed in the first week of February when FPIs deployed ₹8,129 crore. T his sustained inflow suggests that the return of foreign capital is not merely a tactical bounce but potentially reflects a strategic reassessment of India's relative attractiveness within emerging markets, particularly as global risk sentiment improves and concerns about U.S. protectionism recede. The intensity of buying, with single-day inflows exceeding ₹6,000 crore on some occasions, indicates that institutional investors are moving swiftly to rebuild positions after having potentially oversold during the previous quarter's risk-off environment. 

On February 10 alone, they scooped up ₹22.55 billion in equities, pushing month-to-date inflows to about $1.7 billion. T hat is a stark reversal, explaining those sharp post-trade announcement spikes in benchmarks before IT volatility clawed back gains. 

But the real stabilisers are quieter: ETFs and domestic systematic investment plans (SIPs). EPFR data shows India - focused funds raking in $217 million—a seven-month high— mostly via U.S.- and Ireland-based ETFs. Domestically, January SIP inflows topped ₹31,000 crore (exactly ₹31,002 crore, with account counts swelling). This retail ballast is structural; it is not hot money—it is consistent, long-term bids from everyday investors. 

Earnings season? It is mixed, with IT as the fulcrum. The market craves trade-driven multiple expansion, but only if earnings visibility shines through. IT is the sore spot: Fears of AI disruption have wiped out around $50 billion in market value from the top 10 IT firms this month alone, as guidance hints at slower headcount growth and AI eating into traditional services. 

Yet, it is not all doom. Banking is a bright spot—State Bank of India surged on strong earnings, robust loan growth, and optimism around domestic demand. This highlights a shift: domestic cyclicals and financials can lead when IT falters. For the trade story, it means exporters in textiles, gems, and machinery could see earnings uplift if orders flow in, but index-level gains depend on IT stabilising or banks carrying the load. 

Valuation and Outlook
India's equity market has historically commanded a valuation premium over emerging markets, a trend that has been in place for over two decades and spans nearly all sectors since 2003. T his premium, which is not a recent development but rather a structural feature, has often led to discussions about India's perceived expense. However, experts note that India has always been viewed as expensive, with its valuation premium being a long-standing characteristic. In the 2000s and early 2010s, India’s 10-year average P/E ratio stood at approximately 20.66x, significantly higher than the emerging markets’ typical range of 10-12x, reflecting a premium of about 90 per cent. Although this premium narrowed during the stagnation of the corporate profitability seen in the 'lost decade' of the 2010s, it never disappeared entirely. 

Currently, MSCI India's forward P/E ratio is hovering around 21.5x, compared to the MSCI Emerging Market average of 13.6x, representing a 60 per cent premium. However, with a current P/E of 23.76, which is only slightly above the 5-year average of 23.08, the market is not as stretched relative to its recent history as headline numbers may suggest. Additionally, MSCI India's price-to-book ratio relative to the MSCI All Country World Index has fallen nearly two standard deviations below its historical average, marking its lowest level in the past 15 years. This paints a more nuanced picture than simple P/E ratios would indicate. 

While India’s equities underperformed in 2025, delivering just 4 per cent returns compared to over 20 per cent gains in key Asian and emerging market peers, the outlook for 2026 is more optimistic. Analysts forecast a 10-15 per cent growth in corporate earnings, with some projecting earnings growth of up to 16 per cent. This recovery is significant, particularly following the disappointing earnings in 2025. The justification for the premium is rooted in India’s superior growth trajectory, driven by factors like domestic consumption, structural reforms, and the growing digital economy. Structural advantages such as a young demographic, an English-proficient workforce, government reforms, and increasing formalisation provide additional support. Moreover, domestic retail flows, notably through systematic investment plans, have contributed to valuation stability, independent of foreign investor trends. 

Recent developments, such as the U.S.-India trade deal and trade agreements with other countries, are expected to provide a positive catalyst for Indian markets, with valuations likely to  expand. Furthermore, the return of foreign institutional investors (FIIs) in the last month, post the U.S.-India trade deal, also suggests a more positive outlook. This makes India’s current valuation appear less stretched and more comfortable for long-term investors, even as concerns about valuation compression persist. While there remains a risk of de-rating if earnings disappoint again, the structural growth story for India continues to unfold. The valuation premium remains justified by India's long-term growth potential, though it hinges on corporate earnings growth meeting expectations. The current market reset presents an opportune moment for long-term investors, given the supportive policy backdrop and the return of foreign capital, making the market’s valuation more comfortable without appearing overly stretched. 
 

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