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The big story

As the icy temperatures grip Davos, the heat of geopolitical tensions is palpable. President Donald Trump’s interest in acquiring Greenland has stirred transatlantic relations, causing ripples across Europe. In response, European leaders are shifting their focus, seeking new trade partnerships, with a keen eye on India—one of the world’s fastest-growing large economies.

On Tuesday, during the World Economic Forum in Davos, European Commission President Ursula von der Leyen expressed optimism about forging a significant trade deal with India. She emphasized that the European Union is opting for “fair trade over tariffs, partnership over isolation, and sustainability over exploitation.”

Adding to this momentum, von der Leyen, before a high-profile meeting with Indian Prime Minister Narendra Modi in New Delhi on February 28, 2025, highlighted the EU’s interest in developing a security and defense partnership with India. The discussions at Hyderabad House mark a pivotal point in EU-India relations, underscoring the strategic importance both parties place on this budding alliance.

For New Delhi, which has been facing the brunt of punitive U.S. tariffs, this could be a much-needed shot in the arm. Since Trump imposed 50% tariffs on the Asian economy in August last year, it has been looking at alternate markets for its exports and has entered into trade deals with several countries.

“India’s openness to trade agreements predates Trump 2.0, but we have seen deals accelerate as countries look to grow together in an uncertain global environment,” said Richard M. Rossow, senior adviser and chair on India and Emerging Asia Economics at the Center for Strategic and International Studies.

Over the past few months, India has announced trade deals with UK, Oman, and New Zealand. On Monday, UAE and India vowed to double trade to over $200 billion by 2032, with New Delhi also signing a $3 billion LNG procurement deal with the Middle Eastern country.

India will be hoping that the European Commission president’s visit to New Delhi on Jan. 25-27 ends with an announcement of a trade deal, as the country strives to boost its exports and make up for the decline in shipments to the U.S. Experts told CNBC that announcement of a deal during the visit is quite likely.

But they also say that an India-EU trade pact, dubbed by some as the “mother of all deals” — a characterization von der Leyen highlighted in her speech at the WEF — will not replace U.S. as India’s No.1 export destination.

“The EU deal is now central to India’s external economic strategy precisely because there is no trade deal with the U.S,” said Arpit Chaturvedi, advisor with Teneo’s geopolitical risk advisory team.

It gives India an “alternative anchor in the West” and restores some bargaining leverage to strike a deal with the U.S, he added.

According to European Commission data, goods trade between India and the EU in 2024 was over 120 billion euros (about $140 billion), making it India’s largest trading partner. Machinery and appliances, chemicals, base metals, mineral products and textiles are New Delhi top exports to the bloc.

Radhika Rao, senior economist DBS Bank Singapore, said a trade agreement with the EU might not include sensitive segments like steel, auto, and agriculture, which may be covered separately.

EU countries’ trade with India is nearly on par with New Delhi’s goods trade with the United States and China.

But headline trade numbers do not reflect the reality of India’s dependency on the U.S. market: In 2024, India’s goods trade surplus with the U.S. was $45.8 billion, while for EU it was substantially lower at $25.8 billion.

India’s total exports to six major EU markets — Netherlands, Germany, Italy, Spain, France and Belgium — was $43.8 billion in the 9-month ending December compared to $65.88 billion for the U.S. alone.

Given the size of its exports to the U.S., most deals New Delhi is making are “partial shock absorbers,” not a remedy for the loss of trade with the U.S., said Chaturvedi from Teneo.

“The India-EU agreement can partially mitigate the U.S. tariff impact on exports,” said Vishrut Rana, senior economist at S&P Global Ratings, but added that the a trade deal with U.S. remains key for India’s economy.

A deal between India and the U.S. has been a work in progress for a long time. Earlier this month, U.S. Commerce Secretary Howard Lutnick on a podcast said that India could have been the second country to get a deal after the U.K., which signed an agreement with Washington in May.

“I set the deal up. But Modi had to call President Trump. They were uncomfortable with it, so Modi didn’t call,” Lutnick said. The Indian side has called these comments “inaccurate.”

Following Lutnick’s remarks, Sergio Gor, who took charge on Jan. 12 as the U.S. ambassador to India, said that finalizing a trade deal with a large nation like India was “not an easy task,” but the U.S. was “determined to get there.”

Absence of a deal has further pressured the Indian rupee amid volatility in exports to the U.S. Exports dropped 1.8% in December, after jumping 22.6% in the prior month. The rupee is trading at 91.56 per dollar, with improvement hinging on a trade deal with the U.S.

While the “mother of all deals” is an important one for New Delhi, it’s unlikely to be large enough to shield the country from the adverse impacts of U.S. tariffs in the absence of trade pact.

“The loss of the U.S. market can never be compensated by EU even after the FTA,” said Ajay Srivastava, founder of New Delhi-based think tank Global Trade Research Initiative.

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Michael Wan of MUFG Bank said continued outflows from foreign institutional investors and repatriation of foreign direct investments into India from private equity players are the reasons why he expects the rupee to underperform in 2026 relative to other countries.

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Need to know

India and UAE plan to double bilateral trade. India plans to increase trade with UAE to $200 billion by 2032. State-owned companies of the two countries signed a 10-year liquefied natural gas supply agreement worth $3 billion.

Growth slows down for Reliance Retail in December quarter. The third largest vertical of India’s biggest conglomerate, Reliance Industries, reported slower growth, leading analysts to reduce earnings estimates and cut stock target price, even as they maintain a buy rating on Reliance shares.

India’s exports to China soar in December. Exports to China surged 67% in December to $2 billion, in contrast to goods shipped to the U.S. — New Delhi’s biggest export market — that dropped 1.8% to $6.8 billion.

In the markets

As of 2.20 p.m. local time, the Nifty 50 and the BSE Sensex were about 0.1% higher. Both the indexes have had a poor start to the year, with the Nifty down 3.53%, and the Sensex 3.8% lower year to date.

The benchmark 10-year Indian government bond yield slipped for a third straight day, and was last at 6.638%.

The rupee also weakened to another record low against the dollar on Thursday, hitting 91.64 against the greenback.

— Lim Hui Jie

Coming up

Jan. 23: HSBC India manufacturing, services flash PMI

Jan. 25-27: President of the European Council, António Luís Santos da Costa, and the President of the European Commission Ursula von der Leyen to visit India

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