India-US Trade Delays and FII Selling: Market Risks in 2026

General
1

Since the valuations of India continue to be slightly above long-term trends, India’s underperformance could persist in the short term, with muted FIIs inflows as external issues persist as a point of ponder for the domestic market.

As 2026 approaches, the Indian market finds itself at a delicate point. On one hand, India’s economy continues to show resilience, but on the other hand, a mix of global factors is shaping investor confidence. Two issues stand out clearly: the stalled India-US trade deal and continued foreign investor selling.

The Trade Deal That Markets Are Waiting For

During the last two quarters, the market remained focused on India-US trade talks, driven by expectations of relief from the 25% penalty tariff. With no resolution in sight, optimism has given way to disappointment.

The delay is now showing its impact on market mood, with:

  • Ongoing foreign investor caution

  • Pressure on the rupee

  • Uncertainty around exports

As a result, India’s market underperformance may extend into early 2026.

Why Is the Deal Taking So Long?

The proposed trade agreement is expected to happen in two phases:

  1. Removal of the 25% penalty tariff

  2. A broader, long-term trade agreement

The second phase is proving difficult. The US wants India to open up sensitive areas like agriculture and dairy, where India protects small farmers. While India already has trade agreements with countries such as the UK, UAE, Australia, and Switzerland under similar terms, meeting US demands remains a challenge.

Sectors most exposed to delays include:

  • IT

  • Pharma

  • Textiles

  • Jewellery

Even without direct business losses, negative sentiment alone can impact stock prices in these sectors.

Pressure Building on the US Side Too

The US relies heavily on imports, and extended trade restrictions risk pushing prices higher for consumers. Inflation has stayed under control so far due to high inventories and cost-sharing, but this may not last as inventories fall and profits shrink.

Political factors also matter. High inflation played a role in the 2024 election outcome, and with the 2026 midterm elections ahead, the US may soften its stance. Some tariffs have already been cut, but strained India–US relations mean uncertainty remains, and markets don’t like uncertainty.

FII Selling Adds Another Layer of Risk

Foreign investors have been reducing exposure due to:

  • India’s relatively high valuations

  • Moderate earnings growth

  • Better returns in other markets like Japan, China, South Korea, and Taiwan

Globally, the excitement around AI stocks is also cooling. Many companies are yet to deliver strong revenues despite heavy spending. While India isn’t a major AI producer, its tech sector could still feel the slowdown.

What Lies Ahead

There is also a rising risk from global currency movements, especially the yen carry trade, which could pressure emerging markets. India may be less affected than others, but slightly high valuations mean short-term challenges remain.

For now, the Indian market isn’t in trouble, but it is navigating a narrow path, where global clarity will make all the difference.

2

Markets are rarely wrong for long, but they are often early. What we’re seeing in India right now is not a breakdown of fundamentals, but a valuation reset in the absence of fresh global catalysts.

Yes, India is trading above long-term valuation averages, and yes, FIIs are cautious. That combination typically leads to time correction rather than deep price correction. In other words, markets may go sideways and frustrate participants more than they collapse.

On the India–US trade deal, markets have already priced in disappointment. When expectations fall low enough, even incremental progress becomes a positive surprise. The real risk is not delay, but a structural breakdown - and there’s no evidence of that yet. Trade negotiations are political tools, not economic ones, and they tend to resolve when pressure peaks on both sides.

FII selling should be seen in context. Global capital is rotating, not exiting risk altogether. India is competing with cheaper markets, but it still offers earnings visibility, balance-sheet strength, and policy stability - qualities that matter when global volatility returns.

From a trader’s lens:

  • Short term: expect range-bound markets, sectoral rotation, and headline-driven volatility.

  • Medium term: earnings quality will matter more than narratives.

  • Long term: capital flows follow growth and governance - India still scores high on both.

The biggest mistake investors make in such phases is confusing lack of momentum with lack of opportunity. Flat markets are where future leaders quietly build bases.

3

Expect range + rotation until valuations cool or earnings surprise. Ignore noise; watch rupee + earnings revisions + price action.

Quick map:
Valuations ↑ + Flows ↓ → Chop / Underperformance
Deal clarity ↑ or Earnings ↑ → Breakout / Re-rating
Rupee ↓ + Revisions ↓ → More downside risk