At the end of January and the beginning of February, India approved back-to-back trade agreements with the European Union and the United States.
Investors initially welcomed the news, already seeing 2026 as the beginning of a new phase of economic expansion for India. However, this optimism proved short-lived.
Beyond the announcement effect
After nearly 20 years of negotiations, India and the European Union signed a trade agreement on January 27. The deal between two economic blocs representing around 25% of global GDP aims to double trade flows between the two regions by 2032.
A few days later, on February 2, India also concluded a surprise agreement with the United States. Relations between Washington and New Delhi had nevertheless been strained since the start of the American trade war.
By signing agreements that open its market to its two largest trading partners, India has made a major policy shift. To protect its agricultural sector (on which half of the population depends) and its domestic industry, the country had previously been among the most closed economies in the world, with very high tariff barriers.
Mixed reactions from markets
Investors welcomed this departure from protectionism, and Indian equity markets rose sharply in early February.
Greater integration into global trade should support the development of manufacturing employment, the only sector capable of absorbing the large number of young people entering the labour market each year.
Trade openness should also stimulate foreign direct investment, with these capital inflows supporting the country's economic development.
However, doubts about the details and implementation of these agreements quickly weighed on Indian financial markets. In particular, the energy dimension of the agreement signed with the United States raised concerns among investors.
Energy supply under pressure
To circumvent Western embargoes, Russia has been selling oil at discounted prices. India has taken advantage of this opportunity, and Russian barrels accounted for around 25% of India's oil imports at the end of 2025.
Yet, under the agreement signed with the United States, India committed to gradually halting its purchases of Russian oil.
This represents a significant logistical and financial challenge for the Indian economy. Changing suppliers is not straightforward. Crude oils are not identical, and Indian importers accustomed to Russian oil are not always equipped to process Middle Eastern crude, which is expected to replace Russian supplies.
Russian oil was also sold in February at a discount of around $28 per barrel relative to benchmark prices. This cheaper energy helped limit inflation and the trade deficit, while allowing Indian refiners to generate exceptional profits by exporting refined products to Europe.
War in the worst moment
The war in Iran has further complicated India's energy situation. Even with large imports from Russia, 41% of India's oil and 47% of its gas imports transit through the Strait of Hormuz, which is currently closed.
At the very moment when India committed to replacing Russian oil, its main supply route was disrupted. With reserves covering around 50 days of imports (compared with 120 days for China and 250 days for Japan), India's economy is among the most vulnerable in Asia to a disruption in oil flows.
India's situation could therefore quickly become critical. For this reason, the United States has temporarily authorised India to resume imports of Russian oil.
Before the attack on Iran, 22 million barrels of Russian oil were already waiting for buyers on tankers positioned in Asia, with around 80% located near Indian waters. This provides India with some additional margin for manoeuvre, but it has not reassured investors.
A strong economy, a fragile stock market
There is currently a clear disconnect between India's economic performance and its financial markets. Given the sharp depreciation of the Indian rupee against the euro, the Indian stock market has not advanced over the past 12 months. It has been in negative territory since the beginning of the year.
Yet the economy remains very dynamic. According to the latest official estimates, GDP growth is expected to reach 7.6% for the 2025–2026 fiscal year ending on March 31. This is one of the highest growth rates in Asia and the highest among the world's major economies.
Such performance is not exceptional. India's growth has been around 7% for several years and should remain at this level in the coming quarters, supported by resilient household consumption, public investment and a rebound in exports.
Volatily keeps conservative investors away
Investors, however, are not focusing on these favourable economic prospects. Instead, they remain concentrated on the short-term energy risk. Energy and food, whose prices are highly sensitive to energy costs, account for around 50% of Indian household consumption.
A severe oil shock would therefore significantly affect household budgets. A surge in prices would also force the central bank to tighten monetary policy, further slowing consumption and investment. Finally, an oil crisis would reduce corporate profitability.
While these concerns are justified in the short term, they appear exaggerated in the long term. India offers solid economic prospects that justify investment exposure.
However, because of currency and equity market volatility, it is not a market suited to the most risk-averse investors. Indian equities should represent around 5% of a balanced or dynamic portfolio. See our asset allocation strategy.