This report is from this week’s CNBC ‘Inside India’ newsletter, bringing you timely and insightful news and market commentary on the emerging powerhouse. Subscribe here.
The big story
With temperatures below freezing in Davos, geopolitical tensions are boiling as US President Donald Trump’s pursuit of Greenland has thrown transatlantic relations into disarray.
While Europe appears to be standing up to Trump, it is seeking new trade alliances, now focusing on a partnership with the world’s fastest-growing major economy: India.
European Commission President Ursula von der Leyen told the World Economic Forum in Davos on Tuesday that the European Union was “on the cusp of a historic trade deal” with New Delhi. “We choose fair trade over tariffs. Partnership over isolation. Sustainability over exploitation,” she said.
European Commission President Ursula von der Leyen (L) speaks with Indian Prime Minister Narendra Modi before their meeting at Hyderabad House in New Delhi February 28, 2025. The European Union is exploring a security and defense partnership with India, EU chief Ursula von der Leyen said on February 28 before meeting Prime Minister Narendra Modi in New Delhi. (Photo by Money SHARMA / AFP) (Photo by MONEY SHARMA/AFP via Getty Images)
Silver Sharma | Afp | Getty Images
For New Delhi, which has faced the brunt of punitive US tariffs, this could be a much-needed boost. Since Trump imposed 50% tariffs on the Asian economy in August last year, the country has been seeking other markets for its exports and has struck trade deals with several countries.
“India’s openness to trade deals predates Trump 2.0, but we have seen deals accelerate as countries seek to grow together in an uncertain global environment,” said Richard M. Rossow, senior advisor and chair for the India and emerging Asia economy at the Center for Strategic and International Studies.
In recent months, India has announced trade deals with the United Kingdom, Oman and New Zealand. On Monday, the United Arab Emirates and India pledged to double their trade to more than $200 billion by 2032, with New Delhi also signing a $3 billion LNG supply deal with the Middle Eastern country.
India hopes the European Commission president’s visit to New Delhi from Jan. 25-27 will end with the announcement of a trade deal, as the country strives to boost exports and offset falling shipments to the United States. Experts told CNBC that announcing a deal during the visit is very likely.
But they also say that an India-EU trade deal, dubbed by some as “the mother of all deals” – a characterization highlighted by von der Leyen in her speech to the WEF – will not replace the United States as India’s top export destination.
Shock absorber?
“The deal with the EU is now at the heart of India’s external economic strategy, precisely because there is no trade deal with the US,” said Arpit Chaturvedi, an advisor in Teneo’s geopolitical risk advisory team.
This gives India an “alternative foothold in the West” and restores some negotiating leverage to strike a deal with the United States, he added.
According to European Commission data, trade in goods between India and the EU in 2024 was worth more than €120 billion (around $140 billion), making it India’s largest trading partner. Household machinery and appliances, chemicals, base metals, mineral products and textiles are New Delhi’s major exports to the bloc.
Radhika Rao, senior economist at DBS Bank Singapore, said a trade deal with the EU may not include sensitive segments like steel, automobiles and agriculture, which could be covered separately.
EU countries’ trade with India is almost comparable to New Delhi’s goods trade with the United States and China.
But general trade figures do not reflect the reality of India’s dependence on the US market: in 2024, India’s trade surplus in goods with the US was $45.8 billion, while that of the EU was significantly lower, at $25.8 billion.
India’s total exports to six major EU markets — Netherlands, Germany, Italy, Spain, France and Belgium — was $43.8 billion in the nine months ending in December, compared to $65.88 billion in the United States alone.
Given the scale of its exports to the United States, most of the deals New Delhi strikes are “partial shock absorbers,” not a remedy for lost trade with the United States, Teneo’s Chaturvedi said.
“The India-EU deal can partially mitigate the impact of US tariffs on exports,” said Vishrut Rana, senior economist at S&P Global Ratings, but added that a trade deal with the US remains critical for the Indian economy.
The elusive agreement
An agreement between India and the United States has been in the works for a long time. Earlier this month, U.S. Commerce Secretary Howard Lutnick during a podcast said India could have been the second country to strike a deal after the United Kingdom, which signed a deal with Washington in May.
“I was the one who made the deal. But Modi had to call President Trump. They weren’t comfortable with that, so Modi didn’t call,” Lutnick said. The Indian side called the comments “inaccurate”.
Following Lutnick’s remarks, Sergio Gor, who took office Jan. 12 as U.S. ambassador to India, said finalizing a trade deal with a large country like India was “not an easy task” but that the United States was “committed to achieving it.”
The lack of a deal has further put pressure on the Indian rupee amid volatile exports to the United States. Exports fell 1.8% in December, after jumping 22.6% the previous month. The rupee is trading at 91.56 per dollar, with improvement dependent on a trade deal with the United States.
Even if the “mother of all deals” is important to New Delhi, it is unlikely to be important enough to protect the country from the harmful effects of US tariffs in the absence of a trade deal.
“The loss of the US market can never be compensated by the EU, even after the FTA,” said Ajay Srivastava, founder of the New Delhi-based think tank Global Trade Research Initiative.
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Michael Wan of MUFG Bank said continued outflows by foreign institutional investors and repatriation of foreign direct investments into India by private equity players are the reasons why he expects the rupee to underperform in 2026 compared to other countries.
Amish Shah, Head of India Research at BofA Securities, details his outlook for Indian markets for the coming year, adding that the lack of fiscal space for stimulus measures in the Union Budget for FY2027 could lead to a market sell-off.
Need to know
India and the UAE plan to double their bilateral trade. India plans to increase trade with the UAE to $200 billion by 2032. State-owned companies of the two countries have signed a 10-year liquefied natural gas supply deal worth $3 billion.
Growth slows for Reliance Retail in December quarter. The third-largest vertical of India’s largest conglomerate, Reliance Industries, has reported slower growth, leading analysts to cut their earnings estimates and cut their stock price target, even as they maintain a buy rating on Reliance shares.
Indian exports to China soar in December. Exports to China jumped 67% in December to $2 billion, while goods shipped to the United States – New Delhi’s biggest export market – fell 1.8% to $6.8 billion.
Quote of the week
India, like China 15 years ago, still has a lot of growth ahead of it. Its growth is 7.5% per year. It is now the fourth largest economy… I think we should not underestimate India. And I think Indian history is just beginning.
— Fabricio Bloisi, CEO, Prosus
On the markets
From 2:20 p.m. local time, the Clever 50 and BSE Sensex were up around 0.1%. Both indices have had a poor start to the year, with the Nifty down 3.53% and the Sensex down 3.8% year-to-date.
The benchmark 10-year Indian government bond yield fell for the third straight day and was last at 6.638%.
The rupee also weakened to a new record low against the dollar on Thursday, hitting 91.64 against the greenback.
-Lim Hui Jie
Future
January 23: HSBC India manufacturing and services flash PMI
January 25-27: European Council President António Luís Santos da Costa and European Commission President Ursula von der Leyen will visit India
Every weekday, CNBC’s ‘Inside India’ news show brings you news and market commentary on emerging companies and the people behind them. Stream the show live on YouTube and check out the highlights here.
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