India Mutual Funds Surge Amid U.S. Trade Agreement and Earnings Recovery — A Wave of Positive Sentiment

Market Sentiment Shifts: February's Dramatic Turnaround

February saw a dramatic change in investor sentiment. After a quiet start to the year, equity mutual fund inflows jumped by 8.1% month-over-month to 259.78 billion rupees, ending a three-month streak of declines. This resurgence was largely fueled by two major developments: the announcement of a significant U.S.-India trade agreement and signs of stabilization in corporate earnings.

The difference from January was striking. That month, anxiety dominated the market as foreign investors withdrew nearly $4 billion from Indian stocks due to escalating trade uncertainties. Inflows dropped by 14.35% compared to the previous month, and leading indices such as the Nifty 50 and Sensex lost more than 3%, reflecting a clear retreat in market confidence.

The tide turned in early February when India secured a trade deal with the United States, slashing tariffs on Indian exports from 50% to 18%. This move directly addressed the trade risks that had unnerved global investors. Simultaneously, the outlook for corporate earnings improved. While overall profit growth for the Nifty 50 remained in single digits, third-quarter results showed a 7.5% year-on-year increase in profits, up from just 1.9% in the previous quarter. Analysts interpreted this as the beginning of a recovery, especially as the impact of new labor regulations faded into the past.

Foreign investors, who had been net sellers for three consecutive months, reversed course in February, acquiring Indian shares worth 226.15 billion rupees. This dramatic shift from a $4 billion outflow to a substantial inflow highlights how quickly market sentiment can change in response to positive news. The surge in February inflows was a direct result of easing trade tensions and a more optimistic earnings outlook.

The Impact of the U.S.-India Trade Agreement

The February trade pact directly addressed a major source of uncertainty for the market. For months, investors were rattled by the threat of steep U.S. tariffs on Indian exports. In 2025, the U.S. raised tariffs on Indian goods to 50% in response to stalled negotiations and India's ongoing oil imports from Russia, creating a challenging environment for exporters and discouraging foreign investment.

The new agreement eliminated the additional 25% tariff, as the U.S. issued an executive order removing the extra duty on Indian imports effective February 7. This change restored predictability for key sectors such as textiles, leather, and machinery. In exchange, India agreed to reduce or eliminate tariffs on a wide range of U.S. industrial and agricultural products, establishing a more balanced trade relationship.

One of the deal’s most ambitious elements is a five-year, $500 billion purchase target for Indian goods, signaling a long-term commitment to expanding trade between the two nations.

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Despite the bold targets, the agreement is already undergoing diplomatic adjustments. The White House made quiet revisions to the deal’s documentation just days after its announcement, softening language around the purchase target and omitting references to Indian tariffs on certain goods. These changes suggest the deal remains a work in progress and is still subject to negotiation.

Ultimately, the reduction of tariffs from 50% to 18% removed a significant obstacle for Indian exporters and helped restore foreign investor confidence. However, since the agreement is still provisional and its terms are evolving, underlying tensions persist. While the market’s positive reaction is genuine, the trade framework is not yet finalized.

Earnings Recovery: The Engine Behind Market Strength

The surge in February inflows is not just a reaction to news headlines—it is underpinned by a real improvement in corporate earnings. The key metric is accelerating profit growth. For the quarter ending December 31, Nifty 50 companies reported a 7.5% year-on-year increase in profits, a significant jump from the previous quarter’s 1.9%. This shift from stagnation to growth provides a solid foundation for the market’s resilience.

Many analysts believe this is the beginning of a longer-term recovery. Brokerage forecasts anticipate 10-15% earnings growth in 2026, with further gains expected in 2027. This outlook suggests that the recent rally is supported by improving fundamentals, not just speculation. The recovery is broad-based, with BSE 500 companies seeing 16% profit growth, especially in energy and consumer discretionary sectors. Strong festive and rural demand, along with lower input costs, are driving this widespread improvement, indicating the recovery is not limited to a few large firms.

However, challenges remain. The recovery is still in its early stages, with headline earnings growth remaining in single digits for seven consecutive quarters. Sector performance is uneven—while the broader market is expanding, information technology stocks have lagged, with the IT index down about 12% in 2026, compared to a 9% gain for the Nifty 50 since the start of the year.

This divergence highlights ongoing market tensions. While earnings momentum provides a strong base for future gains, the underperformance of the IT sector and the fact that Indian indices still trail other Asian and emerging markets suggest the path ahead is not without obstacles. For now, accelerating earnings growth is the main reason the February inflow surge appears sustainable rather than just a temporary reaction.

Looking Ahead: Key Drivers and Risks

While February’s inflow surge has set a new direction for the market, future performance will depend on several critical factors and ongoing risks. The current environment is one of cautious optimism, where positive trends must be confirmed by real progress.

• Trade Deal Finalization: The agreement remains provisional, and recent revisions indicate it is still being negotiated. The White House recently softened its stance on the $500 billion purchase target and removed references to certain tariffs, signaling ongoing diplomatic recalibration. The economic benefits of the deal must materialize to maintain foreign investor confidence. Any delay or reversal in trade expansion could quickly dampen sentiment.
• Earnings Delivery: The optimistic forecast of 10-15% earnings growth in 2026 is crucial for continued equity outperformance. The recent uptick to 7.5% profit growth is encouraging, but this momentum must continue in the coming quarters. If earnings expectations are revised downward, the market’s re-rating could lose steam. The IT sector’s continued weakness is a key area to watch.
• Foreign Capital Flows: The risk of renewed foreign outflows remains high. The $4 billion withdrawal by foreign investors in January is a reminder of how quickly sentiment can shift. If global risk appetite wanes or the benefits of the trade deal are slow to materialize, capital could exit just as rapidly as it returned. The February reversal was driven by specific catalysts; without sustained earnings growth and a finalized trade agreement, inflows may not last.

In summary, the current positive momentum is not assured. It depends on two main pillars: the successful conclusion and implementation of the trade deal, and the continuation of robust earnings growth. Investors should monitor diplomatic developments and upcoming earnings reports closely. Until these factors are confirmed, the risk of foreign capital outflows remains a significant concern for the market.