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Informist, Tuesday, Feb. 3, 2026

 

By Pratiksha

 

NEW DELHI – The long-awaited trade deal between India and the US, announced late Monday, helped the rupee come out of its downward spiral as it logged its best day in over seven years Tuesday. However, market participants are unsure about the sustainability of the domestic currency's gains in the medium-to-long term.

 

US President Donald Trump Monday said India and the US have concluded a trade deal under which Washington will cut the reciprocal tariff on Indian goods to 18%. Commerce Minister Piyush Goyal Tuesday confirmed that the tariff on Indian goods exports to the US have been lowered to 18% from 50%.

 

The US had slapped 50% tariff on Indian goods in August, which included 25% punitive tariff for India's purchases of crude oil from Russia. The rupee depreciated almost 5% against the dollar last year and was the worst performer among its Asian peers amid the uncertainty over the trade deal with the US and strong foreign portfolio outflows.

 

Now that the deal with the US is in place, market participants expect the rupee to rise gradually in the next few weeks to as high as 89.50-89.00 a dollar. The Indian currency surged 1.4% against the greenback and settled at 90.2650 Tuesday.

 

However, multiple factors suggest room for appreciation in the rupee in the long term may be limited, with the Reserve Bank of India being a major one, according to dealers. MUFG Bank sees the rupee at 93 per dollar by the end of 2026 while HDFC Bank sees it in the range of 90.00-92.00 a dollar in the financial year 2026-27 (Apr-Mar).

 

"The appreciation of rupee will aid the RBI in managing its reserves, including its forward book," said Sameer Karyatt, executive director and head of trading at DBS Bank India. "The current ample rupee system liquidity offers sufficient scope for the RBI to sterilise inflows and reduce its foreign exchange forward book if deemed necessary."

 

The RBI net spent around $49.50 billion from its foreign exchange reserves in 2025 to defend the rupee, as per Nomura. While India's foreign exchange reserves were at an all-time high of $709.41 billion in the week ended Jan. 23, a portion of it is made up of the RBI's large outstanding short forward book, which is only expected to increase with the RBI carrying out $20 billion worth of buy-sell swaps in January and February. The RBI's net short outstanding dollar-rupee forward book was at $62.35 billion at the end of December. Of this, 42% of short positions are due to mature in three months.

 

Apart from the trade deal uncertainty, one of the biggest pain points for the Indian currency has been the strong foreign portfolio outflows from Indian markets. In 2025, foreign portfolio investors withdrew $10.68 billion from the domestic market, on a net basis, the most in three years.

 

With the trade deal now a reality, market participants expect the FPI outflows to slow down. However, the outflows are unlikely to be reversed, they said. "In our view, several factors have contributed to equity outflows, including trade dispute with the US, concerns of overvaluation, India's limited stake in the global AI (artificial intelligence) sector, domestic corporate sector earnings pressure, and expectations of further currency depreciation," ANZ Bank India said in a note.

 

"The recent trade deal appears to have eased some worries about trade frictions and currency weakness, though other challenges persist," it said. "We remain cautiously optimistic about an enduring turnaround in equity inflows, which would benefit India's overall financial account position."

 

On the government debt front, after the trade deal and rupee appreciation, government bond dealers expect FPI flows to revive into fully accessible route government bonds. FPIs have net purchased fewer than $2 billion of these bonds since the beginning of FY26.

 

However, the FPI inflows are not going to significantly change demand-supply dynamics. If there are no further index inclusions, India's government bond market may attract between $3 billion and $5 billion in FPI flows in the remainder of 2026, dealers said. For context, India's outstanding gilts total around $1.3 trillion. A key factor on getting more flows would be Bloomberg's decision on whether to include fully accessible route bonds in its Global Aggregate Index. The next review is due in June.

 

TRADE DEAL INTRICACIES

There are also some potential stumbling blocks in the US trade deal itself, market participants said. While announcing the deal in a post on his social media platform Truth Social, Trump said India will buy US products worth $500 billion. While this is likely to be staggered, it is also likely to add to pressure on the Indian currency, dealers said.

 

"Some aspects such as the commitment to buy $500 billion of US goods over five years appear very difficult to achieve and would mark a substantial increase from goods India bought from the US last year," Mitul Kotecha, head of foreign exchange and emerging market macro strategy Asia, Barclays, said in a note. 

 

India's merchandise imports from the US were at $39.43 billion in the first nine months of FY26. In the same period, India's exports to the US were at $65.88 billion.

 

According to Trump's post, New Delhi has also assured him that India will stop buying Russian crude oil and switch to energy products from the US and, potentially, Venezuela. Market participants remain wary of this clause in the deal. "There are also question marks about how quickly India can wean itself off Russian oil," Kotecha said. "As such, there is potential for disappointment should India not live up to its end of the bargain."

 

Market participants said the lack of confirmation by India of its purported decisions to halt Russian crude oil purchases and buy $500 billion of US goods, including farm products, weighs heavily on eventual implementation of the deal. While the initial reaction to the trade deal announcement, details for which are scarce at this point, has been one of joy, market participants remain cautiously optimistic.  End

 

US$1 = INR 90.26

 

With inputs from Aaryan Khanna

Edited by Rajeev Pai

 

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