Why Indian Stock Market Isn’t Rallying Despite the India-EU Free Trade Agreement
Despite the optimism surrounding the landmark India-EU free trade agreement (FTA), the Indian stock market has failed to witness a sharp rally. Market experts point to mixed corporate earnings, sustained foreign investor selling, and global geopolitical uncertainties as key factors weighing on investor sentiment.
Benchmark indices Sensex and Nifty 50 extended gains for the second consecutive session on Wednesday, January 28, reacting positively to the India-EU trade pact. However, the agreement—often described as the “mother of all trade deals”—has so far fallen short of triggering a strong trend reversal in domestic equities.
In early trade, the Sensex surged over 600 points, or nearly 0.8%, but quickly gave up most of its gains to hit an intraday low of 81,887.93, barely 30 points above its previous close. Similarly, the Nifty 50 climbed about 0.8% in morning deals before slipping to an intraday low of 25,225.70, just 0.2% higher than its last close.
India-EU FTA: Why the Bullish Momentum Remains Limited
While the India-EU FTA has supported market sentiment, it has not led to aggressive buying. One major reason is that the deal was largely priced in by the markets well before its formal announcement, especially after positive signals emerged from global forums such as Davos.
Market experts note that the trade agreement is a long-term positive for India’s economy and export growth, but it does not provide an immediate catalyst for equities. The market continues to grapple with persistent foreign institutional investor (FII) outflows, underwhelming earnings growth, and geopolitical risks.
According to VK Vijayakumar, Chief Investment Strategist at Geojit Investments, markets tend to react sharply only to unexpected developments. Since the India-EU deal was widely anticipated, it failed to generate the kind of surprise needed to lift markets meaningfully in the short term.
India-US Trade Deal Remains More Crucial
Experts also highlight that the India-EU FTA does not directly address key concerns currently impacting markets, such as FII selling, US tariff policies, currency volatility, and weak earnings momentum.
Importantly, market participants believe the India-EU deal cannot replace the significance of a potential India-US trade agreement. The United States remains India’s largest export destination and its biggest bilateral trade surplus partner, making progress on that front more critical for market sentiment.
Budget Expectations Stay Muted
With the Union Budget approaching, markets have not seen a strong pre-Budget rally this year. Analysts attribute the recent modest gains largely to short covering, as derivatives positions indicate elevated short interest.
While expectations from the Budget remain limited, selective policy announcements—particularly around affordable housing or tax relief for foreign investors—could offer short-term support to equities.
Earnings Remain the Key Market Driver
Amid global uncertainties and Budget-related anticipation, corporate earnings continue to be the most important trigger for the stock market. A sustained improvement in earnings growth could help bring back foreign investors and revive broader market confidence.
So far, Q3 earnings results have been mixed. While there are early signs of improvement in some sectors, concerns around rupee weakness and US tariff-related uncertainties continue to cloud the outlook for corporate profitability.
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