Post by : Anis Farhan

The opening week of February 2026 proved to be one of the most turbulent periods for Indian stock markets in recent memory. Following the presentation of the Union Budget 2026, the BSE Sensex and Nifty 50 indexes initially experienced sharp sell-offs, reflecting intense investor concern over specific Budget provisions, especially those affecting trading costs and corporate profitability. However, this bearish spell was quickly counterbalanced by an unexpected development on the global stage — a newly announced India-United States trade agreement that significantly eased tariff barriers and boosted investor sentiment. These two contrasting forces resulted in a seesaw ride for markets, with investors navigating between uncertainty and optimism over growth prospects. The ensuing volatility underscores the complex interplay between domestic fiscal policy and international economic diplomacy in shaping capital market performance.

Budget 2026: Initial Market Reaction

Overview of Budget 2026 Provisions

The 2026 Union Budget, presented by Finance Minister Nirmala Sitharaman, outlined the government’s fiscal strategy for the year, focusing on infrastructure spending, tax reforms, and projected deficit targets. While the Budget aimed at long-term economic consolidation and growth, certain immediate trader-unfriendly measures, such as increased Securities Transaction Tax (STT) on futures and options, unsettled short-term market participants. Analysts attributed the sharp early downturn in benchmark indices to these measures, which were perceived as dampening speculative trading and overall liquidity in capital markets.

Sensex and Nifty Fall on Budget Day

On February 1, markets witnessed one of the most pronounced downturns in recent years. The Sensex dipped over 1,500 points, while the Nifty 50 slid below critical support levels, reflecting a broader market sell-off. This retreat was driven by profit booking by traders who feared reduced turnover in futures and options segments post-Budget. Additionally, the sudden change in trading dynamics on a Sunday trading session — an unusual occurrence made possible by Budget calendar adjustments — added to the anxiety and amplified market movements.

The India-US Trade Deal: Rally Catalyst

Market Reversal on Trade Agreement

Just as market sentiments were recovering from the Budget shock, Indian equities found a powerful positive catalyst: an India-US trade agreement that promised to lower reciprocal tariffs and expand bilateral commerce. The agreement, widely seen as a breakthrough in economic diplomacy, helped lift a major overhang that had earlier weighed on investor confidence. As a result, markets surged on February 3, with the Sensex rallying strongly and the Nifty posting multi-hundred-point gains.

This trade deal was particularly significant in addressing tariff concerns that had lingered since April 2025, when trade tensions escalated and contributed to volatility in capital markets. With tariff reduction commitments — such as lowering tariff rates on Indian exports to the US to 18% — investors took heart that exports could become more competitive, portending stronger earnings for export-oriented companies and sectors.

Investor Psychology and Sentiment Shift

The rapid shift in market mood from pessimism to optimism encapsulates how external developments can override domestic policy concerns in the eyes of capital market participants. The trade agreement served not only as a fundamental improvement in external economic relations but also as a psychological boost for investors who perceived a more supportive global environment for Indian businesses.
This upbeat sentiment was so powerful that Indian equity benchmarks registered one of their best single-day performances in months — underscoring the intensity and scale of the market’s rally response.

Detailed Market Movements

Benchmark Index Volatility

Following the strong rally, markets did not settle into a uniform trajectory. On February 4, caution returned as markets opened with modest declines — a natural correction after an aggressive upswing. Key indices reported mixed outcomes, with Nifty and Sensex encountering resistance after surging sharply in earlier sessions. This pattern suggested that while the trade deal delivered a positive sentiment jolt, traders remained vigilant about underlying macroeconomic concerns and potential profit-taking pressures.

Sectoral Performance Breakdown

A closer inspection of market sectors revealed divergent trends:

Financials and Infrastructure

Financial and infrastructure stocks largely participated in the rally, reflecting expectations that increased trade flows and infrastructure spending in the Budget would benefit these segments over the medium term. Banks and related financial services stocks saw increased trading volumes, buoyed by the prospects of stronger credit demand and improved economic growth.

Information Technology Shares Under Pressure

In contrast to the broad rally, key IT stocks experienced downward pressure. Major technology firms such as Infosys, Tata Consultancy Services, Wipro, and others saw their share prices fall sharply, influenced by sector-specific concerns unrelated to the Budget or the trade agreement. Notably, the launch of new AI tools by a U.S. startup fueled fears among investors that rapid automation could disrupt traditional outsourcing revenue streams — a core strength of the Indian IT industry. This sell-off in IT stocks contributed to intra-day volatility and tempered overall market gains.

External Market Influences

Global Market Trends Impacting Indian Indices

The volatility was not confined to Indian markets alone. Asian markets reacted to global cues, with technology-led sell-offs overseas leading to cautious trading locally. This cross-market influence highlighted the interconnectivity of capital markets, where domestic indices are sensitive to movements in the U.S. and Asian peers. Such global headwinds were reflected in commodities trading and forex movements, further adding to the complexity of market behavior during this period.

Commodity and Foreign Exchange Effects

Commodities, especially oil and gold, also experienced price fluctuations, which further influenced investor behavior. Gold prices extended gains following weaker U.S. equity performance, while crude oil saw upward pressure on concerns over geopolitical tensions. At the same time, the Indian rupee recorded one of its largest single-day gains in years, strengthening significantly against the dollar in response to the trade accord — illustrating how currency markets reacted positively to enhanced trade prospects.

Analyst Perspectives on Market Direction

Market analysts offered nuanced takes on the unfolding scenario. While the trade agreement was broadly welcomed, many cautioned that it was no panacea for all market challenges. They highlighted that the near-term market direction could remain volatile as traders weighed domestic policy impacts against international developments. Particularly, the uneven performance across sectors — with technology showing weakness — suggested that market gains could be selective rather than uniform.

The broader consensus among financial strategists was that while the trade deal improves the growth outlook, markets still face structural headwinds such as high valuation levels, global economic uncertainties, and the potential for profit-booking after substantial rallies. This balance of optimism and caution underpins the prevailing sentiment among institutional and individual investors alike.

What This Means for Investors

Short-Term Trading Implications

For short-term traders, the lessons from this period are clear: volatility creates both risk and opportunity. Rapid market swings demand agile risk management and keen attention to international developments, not only domestic policy. Traders are often advised to monitor technical indicators and maintain disciplined positions to navigate such choppy waters successfully.

Long-Term Investment Outlook

Long-term investors, however, might view these developments with a different lens. The trade agreement could signify structural improvements in external demand for Indian exports, potentially supporting earnings growth over time. Meanwhile, the Union Budget’s emphasis on capital expenditure and infrastructure could lay the groundwork for sustained economic expansion — albeit with initial volatility. Investors focusing on fundamental value might interpret the recent swings as temporary noise rather than long-lasting detriments. Analysts also note that diversified portfolios may better withstand episodic downturns while benefiting from overarching growth trends.

Conclusion: Navigating a Complex Market Environment

The early part of February 2026 underscored the dynamic and multifaceted nature of equity markets. While the Union Budget 2026 initially triggered bearish reactions, indicating trader sensitivity to fiscal policy changes, the subsequent India-US trade deal provided a counterbalancing boost, revitalizing investor confidence. The interplay between these events created a composite market narrative marked by sharp sell-offs, enthusiastic rallies, and sectoral divergences.

As markets evolve, the focus for participants will likely remain fixed on how policy decisions and global agreements translate into real economic gains. Investors and analysts alike will be scrutinizing corporate earnings, trade data, domestic demand indicators, and geopolitical developments to form a clearer picture of market direction in the weeks and months ahead.

Disclaimer:
This article is intended for informational purposes only and does not constitute financial advice. Market conditions can change rapidly, and readers should perform their own research or consult financial professionals before making investment decisions.

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