The Indian benchmark indices, the Sensex and Nifty, recovered early losses to finish nearly 1.5% higher on Thursday, boosted by gains in financial, auto, and IT stocks. Investor sentiment improved following reports of a possible zero-tariff trade agreement between India and the United States.

The NSE Nifty increased 395 points, or 1.60%, to 25,062, while the BSE Sensex increased 1,200 points, or 1.48%, to 82,530.

Metals increased 1.7%, Autos 1.9%, IT 1.2%, and Nifty Financials 1.3%. Gains were also observed in broader markets, as the small-cap and mid-cap indices increased by roughly 0.7% each.

All BSE-listed companies now have a market capitalization of Rs 439.94 lakh crore, up Rs 5.05 lakh crore.

Here are six major factors driving the rally:

1) Negotiations for a zero-tariff trade agreement with the United States

In a major development from Doha on Thursday, US President Donald Trump revealed that India has offered the United States a trade deal that would include "basically zero tariffs" on a wide range of American goods.

"India offered the US a deal, basically zero tariffs," the Republican leader said on the second leg of his three-nation West Asian tour.

Trump's latest comments follow his earlier remarks on April 30, when he stated that tariff talks with India were "going great" and expressed confidence in reaching a final agreement soon. Speaking at an event in Michigan, he stated, "India tariff talks are going great; I believe we'll have a deal soon."

According to a report, India proposed lowering its average tariff differential with the United States from around 13% to under 4%, a 9-percentage-point reduction. This would be one of India's most comprehensive moves toward aligning its trade policies with major global partners.

2) Crude Impact

Oil prices fell more than $2 on Thursday, amid speculation of a possible US-Iran nuclear deal that would ease sanctions and increase global supply.

Brent crude fell 3.5 percent to $63.79 per barrel, while WTI crude fell to $60.89. Lower oil prices help to alleviate inflation concerns and reduce India's import bill, boosting domestic markets.

3) A sharp drop in gold prices

Gold June futures on MCX fell to a one-month low of Rs 90,890 per 10 grams, down 1.5% from Wednesday's close and more than 8.5% from their recent high. The correction comes as geopolitical tensions ease, demand for safe-haven assets falls, and the focus shifts to US economic data and Federal Reserve policy.

Falling gold prices frequently indicate lower risk aversion among investors, which encourages higher equities allocations and reflects improved market sentiment.

4) Strong FII inflows

Foreign institutional investors have invested nearly Rs 50,000 crore in Indian equities since April 15, with net inflows in 19 of the last 20 sessions. This trend follows a three-month period of persistent outflows. 

5) Weakening US dollar

The dollar index dropped significantly from 109.88 in early February to 100.8 on Thursday, a 0.24% decline. Emerging markets like India gain from a declining dollar because it attracts more foreign investment and makes the rupee stronger.

6) Inflationary pressures subside, raising hopes for rate cuts

As previously noted, worries about future Fed rate hikes were allayed when consumer inflation in the US increased by just 0.2% in April, less than the 0.3% that analysts had predicted.

Meanwhile, retail inflation in India dropped to 3.16% in April, which was below the Reuters forecast of 3.27% and the lowest level in six years. Expectations of a rate cut by the Reserve Bank of India have increased as a result of the data, which could accelerate market momentum and economic growth.