Low Inflation & India–US Mini Trade Deal: What Should Investors Focus On?

India’s economy is currently experiencing a “perfect storm.” Retail inflation in June 2025 eased to its lowest level in over six years, while India is on the cusp of a much-anticipated mini trade deal with the United States. These two developments have the potential to reshape the investment landscape.

For investors, the implications are significant. A backdrop of low inflation has already prompted the Reserve Bank of India (RBI) to cut interest rates by 100 basis points (1%) so far this year, creating monetary tailwinds for growth. Meanwhile, a trade pact with the US could unlock a 64% surge in Indian exports over time and boost GDP by an estimated 0.6%, according to a Bloomberg Analysis. This translates into opportunities across multiple sectors. 

Let’s dive into it.

Understanding the Low Inflation Environment

India’s inflation has fallen to its lowest since 2019, with June’s retail inflation at just 2.10% year-on-year and food prices actually in deflation at -1.06%. This is well below the RBI’s 4% target and at the bottom of its 2%-6% tolerance band. The plunge has been driven by a sharp 19% drop in vegetable prices and an 11.76% decline in pulse prices, thanks to ample rainfall boosting harvests. 

Such a steep fall in food costs, which make up nearly half the consumer price index, has been the main factor pulling inflation down.

Even fuel prices have been stable, with fuel and light inflation at just 2.5%, as per government data. The result is a broad decline in inflation across most categories and of items from vegetables and pulses to milk and cereals.

RBI’s Response and Outlook: The low inflation reading has given the RBI room to shift its policy stance toward growth support. In fact, the central bank had anticipated this moderation and “front-loaded” rate cuts, which brought the key rate down to 5.50%. It also trimmed the Cash Reserve Ratio (CRR) for banks by a full percentage point (in phases) to inject additional liquidity into the system. 

Importantly, as of the latest guidance, RBI forecasts inflation to average around 3.7% in FY2026, down from an earlier projection of 4%.

India–US Mini Trade Deal: Opportunity Knocks?

While the inflation story is grabbing headlines, the India-US trade negotiations are also on the watchlist for investors.

A potential India–US trade pact promises to boost export volumes significantly. Who stands to gain?

Key labour-intensive industries, textiles and apparel, to leather goods, gems & jewellery, and seafood may see a positive impact, as US tariffs on rival exporting countries like Bangladesh (35%), Cambodia (36%), and Myanmar (40%) make Indian products more attractive by comparison. 

SBI Research Report highlights that India’s share in the top 5 imports by the USA is small when compared to other Asian countries, but it can gain some ground for US imports, as most of the Asian countries face higher tariff rates compared to India right now.

The anticipated “mini” deal would cap US tariffs on Indian imports at around 10%-15%, as per news reports, but even if the deal doesn’t come up as desired, India can have other options to diversify its exports away from the US.  

Also, with India’s service exports reaching a new high each year, a record $387.5 billion in 2024-25, driven by sectors like IT, financial and business services, the total exports are not likely to get significantly impacted, the SBI Research Report added. 

Export Sectors Set to Benefit

The sectors positioned to benefit most from this deal represent some of India’s traditional strengths:

Textiles and Apparel: With competitors like Bangladesh facing 35% tariffs and Cambodia facing 36% tariffs, Indian textile companies gain a massive competitive edge. The US is already importing significant volumes from these sectors.

Labour-intensive Manufacturing: Beyond textiles, sectors like toys, furniture, and consumer goods could see substantial growth. India is positioned favourably in 22 key export sectors according to trade analysis.

Gems and Jewellery: India has a strong position in this sector, with the US accounting for 38.7% of Indian gem and jewellery exports. The trade deal could further strengthen this relationship.

In return, the US is looking for greater market access for some of its products, which could include agricultural goods (like certain grains or nuts), medical devices, and a reduction of India’s high tariffs on automobiles and ICT products (Information and Communication Technology products encompass a wide range of hardware, software, and services that enable information processing and communication.)

Economic Impact Projections: Macroeconomically, a successful mini trade deal could be a shot in the arm for India’s growth. A Bloomberg Economics analysis estimates that with a broad deal, imports from India could nearly double over the next decade. 

However, it’s worth noting this is an “interim” deal, not a full free trade agreement. So, while it can provide a meaningful short-to-mid-term boost, a comprehensive trade deal would be needed to realise the full long-term potential.

Key Investment Plays

Now comes the key question: how do you actually invest in such an opportunity? The combination of low inflation and trade deal benefits is something investors should keep an eye out for. Let’s break it down.

Banks are the most obvious winners when interest rates fall. Lower funding costs enable banks to borrow money more cheaply from the RBI, which directly improves their profit margins. This is especially beneficial for banks with high loan-to-deposit ratios.

Bank stocks are cheering with rate cuts and low inflation. The Nifty Bank index has so far given 11.3% returns this year (January 1, 2025 – July 18, 2025) as per the market data in comparison to Nifty 50’s 5.8% return in the same period.

Purchasing power returns, too. Lower inflation directly translates to higher purchasing power. Companies in automobiles, home appliances, consumer electronics, and luxury goods are positioned to benefit as discretionary spending increases.

Here’s more:

Consumer Discretionary/Staples: Increased consumer spending power directly benefits sectors like FMCG (Fast-moving Consumer Goods), retail, and consumer durables. Companies with strong pricing power are particularly well-positioned.

Automobiles: Lower interest rates make auto loans more attractive, driving demand for vehicles.

Housing/Real Estate: Reduced borrowing costs for mortgages can boost the real estate sector, leading to increased property values and rental income.

Infrastructure: The Government’s capex push, coupled with lower borrowing costs, will spur private investment in infrastructure projects.

Manufacturing: Lower input costs and stable demand can lead to increased production and profitability.

IT & Software: While often linked to global demand, lower domestic inflation can support stable business environments for these services, and the trade deal may further boost them.

What are the Risks?

No investment opportunity is without risks, and this one has several worth monitoring:

Inflation Risks

Base Effect Reversal: The current low inflation is partly due to favourable base effects. These will reverse over time, potentially pushing inflation higher in the coming months.

Global Commodity Volatility: Oil prices, food commodity prices, and supply chain disruptions could create upward inflation pressure. Any resurgence could force the RBI to pause or reverse rate cuts.

Monsoon Dependency: India’s inflation, especially food inflation, remains heavily dependent on monsoon performance and agricultural output.

Currency Risks: The trade deal’s benefits could be offset by rupee volatility if global conditions change suddenly.

Liquidity Risks: Small-cap investments may face liquidity challenges if global risk sentiment deteriorates.

Sector-specific Risks

Trade Deal Uncertainty: The deal structure and timeline remain fluid. Agriculture and dairy sectors could face pressure from potential US imports.

Implementation Challenges: Even if a deal is signed, actual implementation could face bureaucratic hurdles and practical challenges.

Competitive Dynamics: Other countries may secure similar or better deals, reducing India’s competitive advantage over time.

To Wrap Up

India’s economy and markets in mid-2025 present a compelling story of dual tailwinds. Low inflation has been a gift for consumers. At the same time, the prospect of an India–US mini trade deal opens up new avenues for exports and investments. 

For investors, this one-two punch of domestic and international opportunity is significant. Ensure your portfolio is well-diversified and not over-leveraged or on margin, as a cushion helps you ride out volatility. One modern avenue worth highlighting is the smallcase approach to investing, a platform that allows you to invest in expertly curated model portfolios. You can check out smallcase here.

Disclaimer: This analysis is for educational purposes and does not constitute investment advice. Market conditions can change, and past performance is not indicative of future results. Investors should conduct their own research and/or consult a certified financial advisor before making investment decisions.