Impact of India–US Trade Negotiations on Investor Sentiment and Exchange Rate Stability

Abstract

This study examines how the bilateral trade negotiation cycle between India and the United States (February 2025 to June 2026) is statistically associated with three proxies for foreign investor sentiment toward India: the USD/INR exchange rate, the Nifty 50 equity index together with the India VIX volatility index, and net Foreign Institutional Investor / Foreign Portfolio Investor (FII/FPI) equity flows. Using a structured monthly time series (n = 18) spanning the announcement of Bilateral Trade Agreement (BTA) negotiations, the April 2025 “Liberation Day” reciprocal-tariff shock, the August 2025 escalation to a cumulative 50% tariff, and the February 2026 Interim Agreement that cut tariffs to 18%, the study applies a structural path-analytic model (an AMOS-style, regression-based structural equation specification), one-way analysis of variance (ANOVA) across tariff-negotiation regimes, Pearson correlation analysis, and an event-study framework anchored to the official negotiation timeline. The estimated path model (χ²[1] = 0.98, p = .322, CFI = 1.00, RMSEA = .00, GFI = .985) indicates that net FII/FPI flow is significantly associated with both equity sentiment (β = .66, p < .01) and market volatility (β = −.59, p < .05), and that equity sentiment and volatility jointly transmit to the exchange rate (β = 2.00 and 1.82 respectively, both p < .001), while the direct path from FII flow to the exchange rate is not significant once these mediators are included. One-way ANOVA shows that India VIX differs significantly across tariff-escalation, de-escalation, and routine-negotiation regimes (F = 3.77, p = .047, η² = .33), with FII flows showing a parallel, marginally significant pattern (F = 3.53, p = .055, η² = .32). The findings support a sentiment-mediated transmission channel in which trade-policy shocks affect the rupee primarily by first moving equity-market sentiment and volatility, rather than through a direct, unmediated channel. Because several monthly series are reasoned interpolations between verified anchor points rather than full official daily/monthly records, the results are presented as methodologically illustrative and policy-suggestive rather than as definitive econometric estimates, and the paper specifies the exact data points that require verification against Reserve Bank of India, National Stock Exchange, and National Securities Depository Limited records before any policy or investment conclusion is finalized.