India-US Trade Agreement Anticipated by November 2023: Implications for Tariffs and Market Sectors

Speculation is rife that a long-anticipated trade agreement between India and the US might be announced by late November. Reports suggest India could permit duty-free imports of soybean, corn, and certain dairy products from the US. This follows indications that another round of trade talks may not be necessary.

US tariffs on Indian goods, currently at 50%, have caused fluctuations in India's stock market this year. A potential trade deal could reduce these tariffs to 15-16%, providing relief to sectors like textiles and gems and jewellery. However, this might not significantly impact the broader market.

The expected trade deal could affect specific sectors rather than the entire market. Ajit Mishra from Religare Broking noted that while it would be a positive development, recent market trends suggest some optimism is already priced in. Selective buying might occur in previously affected sectors such as textiles and electronics manufacturing services.

The agreement's details will be crucial in determining its impact. The market will closely examine whether India has had to make compromises or gained new advantages. Any relaxations aligning India's trade terms with neighbouring countries could positively surprise the market.

Shrikant Chouhan from Kotak Securities believes that if tariffs remain below 20%, key export-oriented sectors like pharma, textiles, and gems and jewellery stand to benefit. A tariff range between 15-25% is likely already factored in, but rates above 25% could affect sentiment negatively.

Chouhan also noted that clarity has improved for the IT sector following assurances from President Trump regarding H1B visas. This development is seen as a significant positive for the industry.

Market Sentiment and Foreign Investments

The announcement of an India-US trade deal in November would coincide with improving domestic market sentiment. Earnings are expected to recover further in Q3 after a decent Q2 performance, supported by stable macroeconomic fundamentals.

However, foreign investor flows have been inconsistent due to global uncertainties. VK Vijayakumar from Geojit Investments pointed out that despite recent underperformance, India's valuations remain higher than markets like Taiwan and South Korea, which are showing stronger earnings growth.

Vijayakumar also highlighted that hedge funds have been withdrawing money from India to invest in AI trades. This trend needs stabilisation, and the current correction in AI stocks is viewed positively for India.

The potential trade agreement comes at a time when optimism is building for a stronger Q3 performance amidst stable global cues. The overall market setup appears constructive despite muted earnings so far meeting expectations.