The US agreed to slash tariffs on India from 50% to 18% after reaching a trade agreement on Indian exports and removing additional penalties added last year for importing Russian oil.

The move follows negotiations that tied market access to energy sourcing and signals a reset in trade relations between the two economies, Times of India reported on February 2.

US President Donald Trump announced late in the evening of February 2 that tariff rates on Indian goods would fall to 18% from 25%, while an extra 25% punitive duty would be scrapped with immediate effect. The decision was linked to India’s commitment to halt purchases of Russian oil, aligning New Delhi more closely with Washington’s energy and geopolitical priorities.

New Delhi was incensed by the punitive tariffs that were imposed as Trump attempted to ratchet up the pressure on Moscow as part of the Ukraine peace talks process. India’s foreign ministry issued a scathing note after they were announced, pointing out that the EU imported more Russian oil than India, yet had not suffered from a similar “punishment.”

The new deal comes as India is vigorously diversifying its trade relations and Trump is attempting to find new markets and rebalance what he sees as the US “deficit problem.”

Modi also committed India to "BUY AMERICAN at a much higher level," in addition to buying more than $500bn worth of US energy, including coal, along with technology, agricultural and other products, Trump said in his social media post.

"They will likewise move forward to reduce their Tariffs and Non Tariff Barriers against the United States, to ZERO," Trump said of India.

Trump released few other details of the deal, such as its commencement date nor a deadline by which India agrees to halt the import of Russian crude. India is currently Russia’s biggest customer for Russian oil after Moscow redirected all its oil exports to Asia after the EU imposed twin sanctions on Russian oil at the end of 2022.

Previous trade deals with other major Asian trading partners including Japan and South Korea have included commitments to invest hundreds ofbns of dollars into US industries, but the India announcement did not mention any specific investments, Reuters reports.

The trade spat with the Trump administration has been hugely damaging for India, making it the worst performing emerging market in the world in 2025. As tensions rose, record numbers of foreign investors fled the market, Reuters reports, but Indian stocks rebounded, rising 5% after Trump’s social media post.

"Wonderful to speak with my dear friend President Trump today. Delighted that Made in India products will now have a reduced tariff of 18%," Prime Minister Narendra Modi said in a social media post on X. "Big thanks to President Trump on behalf of the 1.4bn people of India for this wonderful announcement."

Trump hinted that part of the deal was a commitment to buy Venezuelan oil that is now under US control following Operation Maduro on January 3 as well as US oil. India relies heavily on oil imports, covering around 90% of its needs, and importing deeply discounted Russian oil since the start of the war in Ukraine has helped lower its import costs leading New Delhi to defy US calls to end the trade.

More recently as the White House ratchets up the pressure, India has begun to winddown its Russian imports of oil to 1.2 million barrels per day in Jaunary to a projected 1 million bpd in February and 800,000 bpd in March, according to a Reuters report.

The revised US deal comes on the back of an even more comprehensive trade deal with the European Union(EU) in the form of a Free Trade Agreement (FTA) signed on January 27 that European Commission President Ursula von der Leyen dubbed “the mother of all deals”. The combined stimulus of the EU and US trade deals is likely to inspire improved sentiment in the Indian equity markets which have been in a relatively low phase ever since the start of the new calendar year.

The agreement was presented by both sides as reflecting stronger cooperation between the world’s largest democracies and an expanding strategic partnership.

Trump said the decision was taken following a direct request from Modi and framed the agreement as a gesture of mutual respect, adding that bilateral ties would strengthen further. Modi welcomed the outcome, emphasising benefits for India’s 1.4bn population and underscoring shared interests in growth and stability.

The deal removes a layer of trade uncertainty for Indian exporters and could support volumes in sectors sensitive to US tariffs. For investors, the outcome may improve sentiment towards India focused manufacturers and exporters, while reinforcing expectations of US India economic engagement.

Bilateral trade between India and the United States reached a record high of an estimated $200bn in 2025. While official full-year figures have yet to be published, preliminary data from the US Census Bureau and Indian government sources indicate sustained growth in both goods and services trade throughout the year.

Between January and November 2025, US goods exports to India totalled approximately $50.9bn, while imports from India reached around $88.8bn. This resulted in a goods trade deficit of $37.9bn in India’s favour, continuing a long-standing trend driven by Indian exports of pharmaceuticals, textiles, machinery, and electrical equipment to the US.

In the services sector, the most recent full-year data from the Office of the United States Trade Representative showed US exports of services to India stood at $28.7bn in 2024, while imports totalled $34.8bn, yielding a services trade deficit of $6.1bn. The 2025 figures are expected to surpass these levels amid strong performance in IT services, business consulting, and tourism.

Taken together, the US trade deficit with India across goods and services is estimated to be between $44bn and $46bn in 2025. The surge in bilateral trade follows a period of strategic cooperation on supply chains, semiconductors, and defence manufacturing, with both governments describing economic engagement as a central pillar of the relationship.