India-EU trade deal: How the ‘mother of all deals’ may reshape stock markets

India and the European Union (EU) on Tuesday, January 27, finalised a long-awaited free trade agreement (FTA), a development Prime Minister Narendra Modi described as the “mother of all deals.” The agreement, concluded after nearly 20 years of intermittent negotiations, comes at a critical time when global trade is under pressure due to rising protectionism and tariff policies pursued by the United States under President Donald Trump.

For Indian equity markets, the India-EU FTA is being viewed as a structurally positive development, though analysts caution that its benefits will likely play out over the medium to long term rather than triggering an immediate market rally.

The EU is India’s single largest trading bloc and the world’s second-largest economic zone after the US. In FY25, bilateral trade between India and the EU stood at $136.5 billion.

As per the agreement, the EU will cut tariffs on 99.5% of goods traded over a phased period of seven years, with zero-duty access for key Indian exports such as marine products, textiles, leather, chemicals, rubber, base metals, and gems and jewellery.

According to Madhavi Arora, Lead Economist at Emkay Global, the trade deal could act as a counter-cyclical buffer for India at a time when global growth remains uncertain.

She estimates that improved market access could lift India’s exports to the EU by nearly $50 billion by 2031, led primarily by medium-technology manufacturing. Higher foreign direct investment, better import efficiency, and technology transfer could further enhance productivity and earnings potential for Indian companies.

From a stock market perspective, sectors such as pharmaceuticals, textiles, chemicals, engineering goods, and IT services are seen as key beneficiaries.

Regulatory certainty under the FTA could support IT services exports, where the EU already accounts for nearly one-third of demand. Export-oriented textile and apparel firms may also gain competitiveness due to lower tariffs and smoother compliance norms.

Market experts also believe the deal could partially offset the impact of higher US tariffs. Sujan Hajra, Chief Economist at Anand Rathi Group, noted that there is significant overlap between sectors affected by US tariffs and those benefiting from EU market access, including gems and jewellery, marine products, garments, and textiles.

However, the agreement also opens India’s tightly regulated domestic market. India will gradually slash tariffs on cars to 10% over five years from levels as high as 110%, while duties on wines and spirits will also be reduced sharply.

This could increase competitive pressure on select domestic players, particularly in automobiles, dairy, and some MSME segments.

Stock-specific impact is expected to be mixed. Auto ancillaries such as Motherson, Bharat Forge, and Sona BLW could benefit from export opportunities, while textile exporters like Welspun Living and Gokaldas Exports may see demand tailwinds.

On the flip side, companies such as Tata Motors (via JLR) and Sula Vineyards could face margin pressure due to intensified European competition.

Overall, analysts agree that while near-term market sentiment remains weighed down by foreign capital outflows, geopolitical risks, and mixed Q3 earnings, the India-EU FTA strengthens India’s long-term equity story by deepening its integration into global value chains.