The U.S. India trade agreement has dispersed the dark clouds in the unloved Indian rupee, and is likely to halt the unremitting foreign selling in stocks, but investors contend that earnings growth has to recover and fundamentals have to become better to sustain buying.

The much-anticipated agreement caused a boom in the stock market and the best performance of the rupee in seven years on Tuesday, as it indicated that the relationship between the two countries on the diplomatic and trade front was getting better.

That, though, was not the only reason with the currency and stock markets that have been lagging regional and world standards by far since the start of last year and experienced foreign allocations that are at their lowest in a twenty-year history.

Despite high levels, the Indian equities are susceptible to AI interference and, with no firms in the industry, have been left out in the AI rush.

Even though the information about the trade agreement is not available in detail, it is unclear whether it permits companies to at least begin making capital expenditure plans.

“I do not believe that tariffs are an immediate effect, but it definitely contributes to sentiment, that is, it is best thought of in that way,” said Michael Bourke, head of global emerging markets, equities, at M & G Investments.

“Does that mean that because tariffs have reduced, you suddenly see earnings soaring? I am not yet convinced that that is a line I would draw more than once.”

“It is a deal that is significant to markets, but mainly to sentiment and valuation other than the near-term uplift in earnings,” said Naomi Waistell, a fund manager in the emerging equities team of Carmignac, which runs these assets with a value of $48.5 billion.

“The deal fails to address some of the more recent problems with Indian equities: valuations remain high… forward earnings growth is lower than that of EM counterparts, and there are no globally scalable AI-beneficiary companies.”

This is because foreign investors have withdrawn about $23 billion of the Indian stocks since the beginning of 2025, yet they injected a total of $580 million on Tuesday.

Vikas Jain, the head of India fixed income, currencies and commodities trading in the Bank of America Mumbai office, said that the flow of foreign investors should pick up somewhat in the near future.

The underweight investors will be brought to the immediate neutral position. The process of going overweight will be contingent on growth revival and the type of policies announced by the government.

RUPEE RELIEF

Analysts and traders argue that the deal would also be a relief to the battered currency in India.

The rupee has performed the worst amongst the Asian currencies over the last 12 months, and the central bank is already forced to intermittently defend the currency as it has dropped to 88 per dollar when the tariffs were set to unprecedented lows of 92 in January.

The increased appetite of the firms to hedge against the rupee weakness and the central bank’s tendency to increase the FX reserves are some of the factors that, the traders assert, might serve as the roadblock to a prolonged rally in the currency.

“India had a balance-of-payments risk caused by tariffs on Indian goods, which caused depreciation of the INR. The trade agreement disrupts this cycle… making foreign investors look at Indian stocks with greater objectivity,” according to California-based Peeyush Mittal, a portfolio manager with Matthews Asia.

The threat posed by the absence of apparent AI champions was in effect on Wednesday, too, with the stocks of Indian IT companies falling more than 6% following the introduction of AI capabilities by an anthropic-based workplace productivity aid that left the sector vulnerable to disruption.

Indeed, there are still investors who are optimistic about India, and they consider it to be an attractive trade. Sam Konrad, the investment manager of Asian equities at Jupiter Asset Management, was underweight India at the beginning of 2025, but has been increasing his funds in the last couple of weeks.

Indian financials are also a recent acquisition of M&G Bourke, though it is underweight.

Greater distributions can be time-consuming. The profit growth of Indian companies has stuck in the high single digits in the last six consecutive quarters, by far less than the 15%-25% growth achieved in the 2020-21 and 2023-24 periods.

Goldman Sachs increased their earnings per share expectation on Indian stocks this year to 16 per cent as opposed to 15 per cent. They are projecting a 12 per cent dollar reimbursement of Indian equities within a period of 12 months, as compared to 20 per cent of Chinese equities.