India-EU trade deal: Is trade war caused buy Trump's tariffs preparing to shift towards bond market?

The Indian stock market is set to reopen on Tuesday after the Republic Day holiday, with investors watching closely for relief from aggressive US tariff measures and optimism around progress in the India–European Union (EU) trade agreement.

On Friday, domestic equities came under heavy pressure amid sustained foreign institutional investor (FII) outflows, rising geopolitical risks, caution ahead of the Union Budget 2026 and a mixed set of corporate earnings for the December quarter. The sell-off reflected not just local factors, but growing unease over global trade and capital flows.

India–EU trade deal seen as a buffer

European leaders have arrived in India for the 16th India–EU Summit, where discussions are centred on advancing a long-pending Free Trade Agreement (FTA) aimed at strengthening bilateral trade ties.

Market participants see potential progress on the deal as a counter-cyclical buffer for the Indian economy, helping boost exports, widen access to European markets and support supply-chain diversification at a time when global trade is becoming more fragmented.

A breakthrough on the FTA could enhance India’s participation in global value chains, improve access to European markets and support supply-chain diversification. With trade flows under pressure from tariff threats and protectionist policies elsewhere, investors believe stronger India–EU economic engagement could help insulate parts of the Indian economy from external shocks.

The timing of the summit has added significance, coming amid renewed concerns over US trade policy. US President Donald Trump’s tariff rhetoric has unsettled global markets, particularly after he threatened to impose a 10% tariff on European countries that, according to him, opposed his stance on Greenland. The comments revived fears of a broader trade confrontation, weighing on investor sentiment globally.

How will it impact bonds?

Moves in global bond and currency markets underscored the shift in risk appetite. Earlier in the week, global investors showed signs of trimming exposure to US assets following Trump’s tariff threats. US Treasury bond prices fell sharply, pushing yields higher, while the US dollar weakened against several major currencies, including the Swiss franc.

Although market moves moderated later in the week, the episode highlighted how quickly capital can rotate toward perceived safe assets during periods of uncertainty. In risk-off scenarios, bonds and safe-haven currencies tend to attract flows, often at the expense of emerging market equities and debt.

Sachin Sawrikar, Founder and Managing Partner at Artha Bharat Investment Managers, said currency volatility remains a key challenge for foreign investors evaluating India’s risk-adjusted returns.

“Currency volatility continues to hinder foreign investment into India, particularly for global investors assessing risk-adjusted returns. While India’s long-term growth prospects remain robust, abrupt currency fluctuations significantly erode returns when repatriated to foreign currencies,” Sawrikar said.

He added that such dynamics intensify during global risk-off phases. “In risk-off scenarios, global investors retreat from emerging markets toward safe-haven currencies and sovereign bonds. India typically experiences outflows from both debt and equity markets, exerting downward pressure on the rupee,” he said, noting that rising bond yields often reflect foreign portfolio reductions.

From a domestic perspective, bond markets remain sensitive to currency pressures and supply-demand dynamics. Namrata Mittal, CFA, Chief Economist at SBI Mutual Fund, said yields are likely to stay elevated for structural reasons.

“Bond yields are likely to remain elevated due to tight demand–supply conditions and currency market pressures,” Mittal said.

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