Updates to close of equity and FX markets, updates graphic, adds comments from Indian official in paragraph 6

By Jaspreet Kalra and Bharath Rajeswaran

MUMBAI, Feb 3 (Reuters) - India's financial markets rallied sharply on Tuesday after a trade deal that slashed U.S. tariffs on Indian goods to 18% from 50%, a development that investors said removed a key drag on the country's stocks, bonds and currency.

India's benchmark stock index, the Nifty 50 .NSEI, rose 2.5% and the rupee INR=IN climbed more than 1% to 90.2650 per dollar in early trading. The yield on the country's 10-year benchmark bond IN064835G=CC declined 5 bps to 6.72%.

The Nifty posted its best one-day gain since May 2025, while the rupee logged its best rally in more than seven years.

HALT TO RUSSIAN OIL PURCHASES

U.S. President Donald Trump announced the deal on social media following a call with Indian Prime Minister Narendra Modi, noting that India had agreed to halt Russian oil purchases and lower trade barriers on U.S. exports.

While Trump's announcement was scant on details, an Indian government official said India had agreed to buy petroleum, defence goods and aircraft from the U.S., while partly opening its guarded agricultural sector.

Indian stock markets and the rupee have been battered since the tariffs were levied by Washington in late August, placing them among the worst-performing emerging market assets in 2025, with record foreign investor outflows.

The trade breakthrough was expected to alleviate the persistent drag, with investors expecting a bounce-back in foreign sentiment and flows into Indian assets.

"A successful bilateral trade agreement should help enhance investor confidence, boost foreign investment and capital expenditure plans while strengthening the Indian rupee," said Marcella Chow, global market strategist at J.P. Morgan Asset Management.

The trade deal was also expected to lift a pall of geopolitical uncertainty which had accompanied the U.S.-India trade rift, keeping investors cautious on ploughing money into the country.

"The key tail risk of geopolitical isolation about which investors were concerned has now been adequately addressed by back-to-back trade deals with the European Union and United States," economists at Citi said in a note.

US BREAKTHROUGH FOLLOWS TRADE DEAL WITH EU

The breakthrough with the U.S. comes less than a week after India signed a long-awaited trade deal with the European Union that was expected to eliminate or reduce tariffs on 96.6% of traded goods by value.

Analysts at Jefferies expect Indian firms in the auto ancillary, solar manufacturing and chemicals sectors to be among the largest beneficiaries of the U.S.-India trade deal.

"The reduction of the U.S. tariff rate on most Indian goods will reinvigorate India’s export growth to the U.S.," credit rating agency Moody's said in a note.

India's exports to the U.S. rose 15.88% year-on-year to $85.5 billion in January-November, while imports stood at $46.08 billion, Indian government data shows.

"Even though India has reduced its purchase of crude oil from Russia in recent months, it is unlikely to cease all purchases immediately which could be disruptive to India’s economic growth," the note added.

Indian refiners will need a wind-down period to complete Russian oil deals before imports can be halted and they have so far not been ordered by the government to do so, two refining sources said on Tuesday.

Shares of Reliance Industries RELI.NS, the oil-to-telecom conglomerate, were last up over 4%, leading the advance in stock benchmarks.