For six long months, the rupee lived under a cloud. This wasn’t a mild drizzle of bad news — it was a policy storm triggered by a 50% U.S. tariff on Indian imports. USD/INR stopped trading on charts alone and began reacting to headlines, speeches, posts, and policy surprises.
From the relatively calm 86–87 zone, the rupee was jolted all the way to near 92. Every bounce met fresh doubt, every dip raised new questions. Markets weren’t trading data — they were trading uncertainty. And uncertainty, like gravity, pulls currencies lower. Then, almost overnight, the balance shifted.
A social media post from Donald Trump landed like a thunderclap. Warm words with Prime Minister Modi. Talk of friendship. And the line markets cared about most — a trade deal.
The message was simple and powerful: U.S. tariffs on Indian goods cut from 50% to 18%. Sentiment flipped instantly. The rupee posted its strongest single-day gain since 2018. The drop from 92 to near 90.15 felt less like a slow adjustment and more like a trapdoor opening under USD/INR.
Now, as the dust settles, the market faces a familiar dilemma: is this move an indication of exporter selling, or an opportunity for fresh buying interest? In moments like these, it helps to step back and assess the full picture.
Commerce Minister Piyush Goyal was quick to clarify what the deal is — and what it isn’t. Sensitive sectors like agriculture and dairy remain outside its scope, ensuring no compromise on key domestic interests. In his words, this is India’s most favourable trade outcome relative to peers.
And the numbers support that claim.
With tariffs now at 18%, India finds itself in a far more attractive lane than many of its competitors in labour-intensive exports.
• Vietnam, Cambodia & Bangladesh: 20% tariff
• Malaysia, Thailand & Pakistan: 19% tariff
• China: 34% tariff
Think of it like a marathon where everyone is still running uphill — but India’s slope just became a little gentler. That relative edge matters.
Sectors That Finally Breathe Easier
The relief becomes more tangible at the sector level. The deal cuts tariffs on nearly 60% of Indian exports to the U.S. This materially improves competitiveness across a wide range of sectors — garments, leather, footwear, carpets, shrimps, and gems and jewellery.
In garments, India now enjoys a marginal edge over Bangladesh and Sri Lanka, while exporters in gems and jewellery are watching closely for the fine print, with optimism steadily building.
In relative trade terms, India has clearly moved into a better lane — and global investors may just be starting to take notice.
Foreign Flows: From Drag to Potential Driver
Foreign portfolio flows have been one of the rupee’s biggest pain points over the past year, and the before-and-after contrast around tariffs is hard to ignore.
In the six months preceding the imposition of U.S. tariffs, cumulative FII flows into India were modestly positive at USD 0.81 billion. In the six months that followed, tariff-related uncertainty flipped the picture, driving net outflows of USD 6.92 billion.
That overhang is now expected to gradually ease, with flows likely to gravitate back toward pre-tariff levels over time.
A clearer trade outlook, more reasonable equity valuations, and resilient macro fundamentals materially strengthen India’s investment case. If global risk conditions remain broadly supportive, foreign inflows could slowly return, reversing recent outflows and providing a steadier backdrop for the rupee.
Headwinds for the Rupee:
A Deal Without Paperwork
For all the recent excitement, uncertainty still lingers.
While Trade Minister Piyush Goyal has indicated that India and the U.S. expect to sign a formal trade agreement in March — with a joint statement likely in the next four to five days — the deal remains unfinished business for markets.
Key elements have now been outlined:
• The U.S. is expected to cut duties on Indian exports to 18% from 50%
• India, in return, has agreed to purchase around USD 500 billion worth of U.S. goods over five years
• This includes USD 70–80 billion of Boeing aircraft orders
• A formal agreement is expected to take another 30–45 days to conclude
This added clarity does offer some comfort, but it falls short of full confidence. The agreement has still not been formally signed, enforcement mechanisms are unclear, and the timelines remain indicative rather than binding.
The USD 500 billion purchase commitment, while now framed over five years, continues to raise questions.
Even on an annualised basis, it implies imports of roughly USD 100 billion per year — nearly double India’s current total imports from the U.S. Execution risk remains high, particularly given India’s existing trade patterns and fiscal constraints.
Until the final text is signed and released, foreign investors are likely to stay selective. Markets may welcome the intent, but they will wait for enforceable detail.
Crude Oil: The Russian Question
President Trump has also stated that India will end purchases of Russian crude over an undefined timeline, while increasing imports of U.S. energy, including oil and coal, and potentially Venezuelan crude with U.S. approval.
This is easier said than done.
Russian oil has offered India meaningful discounts, cushioning the impact of high global prices. Moving away from it could raise energy costs and widen the trade deficit, especially if alternatives come at a premium. Any sustained rise in India’s import bill directly affects the rupee’s external balance.
Gold: A Quiet, Persistent Pressure
High gold and precious metal prices remain a mild but steady headwind for the rupee. India’s structural dependence on gold imports means that elevated prices mechanically widen the import bill, even if volumes soften.
Adding another layer is the RBI’s own strategy. As part of a broader de-dollarisation trend, the central bank has been steadily increasing its gold holdings. Gold now accounts for about 13.6% of India’s forex reserves of roughly USD 687 billion, up from 9.3% a year ago.
While this strengthens reserve diversification over the long term, it also reinforces the rupee’s near-term sensitivity to elevated gold prices. Firm gold prices, driven by global rate uncertainty or geopolitical stress, are likely to cap rupee appreciation.
The RBI’s Invisible Hand
Finally, there is the RBI’s forward book.
The central bank entered 2025 with a large net forward short position, which the RBI had unwound from around USD 88 billion to approximately USD 53 billion. However, as the rupee came under renewed pressure, the position expanded again to nearly USD 66 billion.
India’s total forex reserves currently stand at USD 723.8 billion, of which foreign currency assets account for roughly USD 564.9 billion. However, once the USD 66 billion net forward short is adjusted for, the effective FX buffer is materially lower, as the RBI will need to buy that amount of dollars at a future date.
This forward overhang limits the speed at which the rupee can sustainably strengthen. Even if capital inflows revive, the RBI is likely to absorb incoming dollars to rebuild its buffers, thereby capping sharp appreciation in the currency.
Outlook: A Market Catching Its Breath
After the sharp adjustment, USD/INR appears to be entering a consolidation phase, with near-term moves likely driven by positioning and direction of flows. The 89.50–89.80 zone should provide strong support, reflecting probable RBI absorption on dips.
On the upside, the pair has room to drift toward 91.20–91.50, as lingering uncertainties around capital flows, energy dynamics, and policy signalling continue to tilt risks modestly toward rupee weakness.
Structurally, the backdrop remains unsupportive. Even if portfolio inflows improve, India remains a trade-deficit economy, and the proposed USD 500 billion purchase of U.S. goods over five years adds further medium-term pressure on the trade balance, increasing reliance on sustained capital inflows.
Looking at historical rupee themes, 2022 was a clear year of depreciation, followed by relative stability during 2022–2024, largely supported by active RBI management.
2025 again leaned toward depreciation. Against this backdrop, 2026 is shaping up to be a volatility-heavy year, marked by sharper two-way moves rather than a one-directional trend — with downside risks still more persistent than upside follow-through.
As volatility replaces stability, the rupee in 2026 is likely to reward active hedging and disciplined positioning, rather than directional complacency built on the experience of the past few years.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
Source Name : Economic Times