US and India end months of trade tensions with landmark deal

President Donald Trump and Prime Minister Narendra Modi announced a major trade agreement on February 2, ending months of escalating tensions between the United States and India. The deal represents a significant shift in the relationship between the world's two largest democracies and marks a turning point after a period of heavy tariffs that had strained bilateral ties.

The centerpiece of the agreement is a dramatic reduction in US tariffs on Indian goods. Tariffs will fall from 50 percent to 18 percent, effective immediately. This represents a major win for India, which had been facing some of the highest tariff rates applied to any major US trading partner.

Background

The trade tensions between the US and India had been building for months. Starting in August 2025, the Trump administration imposed a 50 percent tariff on Indian goods, citing India's continued purchases of Russian crude oil. This tariff consisted of two parts: a 25 percent reciprocal tariff and an additional 25 percent punitive tariff that officials said was linked to India's energy purchases from Russia.

The situation created significant strain on the bilateral relationship. India bristled at some of Trump's public statements about his role in resolving a border conflict between India and Pakistan, which Indian officials disputed. These tensions made negotiating a trade deal politically sensitive for Modi's government.

The deal comes just days after India and the European Union reached their own trade agreement, suggesting New Delhi was working to diversify its trade partnerships amid the US tensions.

Key Details

The agreement centers on a reciprocal tariff reduction and commitments around energy purchases. Trump stated that India has agreed to stop buying Russian crude oil and instead purchase over 500 billion dollars worth of American energy and other products. India will also be able to resume purchasing Venezuelan oil under a system managed by Washington.

"Out of friendship and respect for Prime Minister Modi and, as per his request, effective immediately, we agreed to a Trade Deal between the United States and India, whereby the United States will charge a reduced Reciprocal Tariff, lowering it from 25% to 18%."

The tariff reduction applies broadly to Indian exports. What was previously a 50 percent total levy on many Indian goods—combining reciprocal and punitive tariffs—will now be 18 percent. This immediate reduction took effect when the deal was announced.

India's commitment to purchasing American goods is substantial. The agreement pledges India to buying over 500 billion dollars in US energy, technology, and agricultural products. This figure shows how significant a shift the deal represents in trade flows between the two nations.

The agreement also includes provisions related to nuclear energy cooperation. A bill known as the G-Shanti agreement was signed, which opens opportunities for both private and public sector participation in nuclear energy projects.

Market Response

Financial markets reacted swiftly to the announcement. India's stock market surged following the news, with the Sensex rising over 2,200 points and the Nifty climbing 700 points. Fund managers described the deal as eliminating a "hanging sword" that had created uncertainty over the Indian economy.

The Indian rupee also gained strength against the dollar following the tariff reduction announcement.

What This Means

The deal represents a fundamental realignment in US-India trade relations. For India, the immediate benefit is clear: tariffs on its exports fall sharply, making Indian goods more competitive in the US market. Indian exports to the United States account for almost a fifth of India's total exports, making this tariff reduction significant for the country's overall trade position.

The agreement also reshapes India's energy strategy. By committing to reduce Russian oil purchases and increase American energy imports, India is moving away from reliance on US rivals like Russia and Iran. This shift aligns India's economic interests with broader US geopolitical objectives, particularly regarding sanctions on Russia related to the war in Ukraine.

For the US, the deal secures a commitment from a major trading partner to purchase substantial amounts of American goods. It also represents a diplomatic victory, as Trump had made resolving trade disputes a priority of his administration.

The agreement comes at a time when India is also strengthening trade ties with other partners, including the European Union. This suggests India is working to build a more diversified trade portfolio rather than becoming overly dependent on any single partner.

Indian Commerce Minister Piyush Goyal indicated that the deal clears the way for further progress on other trade issues between the nations. He stated that with major obstacles removed, India and the US can now move toward closure on their broader bilateral trade negotiations.

However, some details of the agreement remain unclear. While Trump claimed India has agreed to stop buying Russian oil entirely, Indian officials have been more measured in their public statements, focusing primarily on the tariff reductions. The exact scope and enforcement mechanisms of the energy purchase commitments have not been fully detailed.