- India-US trade deal boosted rupee to its best session since 2018, closing at 90.27 per dollar
- US will cut reciprocal tariffs on Indian goods to 18% from 25%, effective immediately
- Deal eliminates 25% duty linked to purchases of Russian crude oil, easing costs for India
The India-US trade deal boosted the rupee to its best session since 2018 on Tuesday as foreign investors flocked into a market they cashed out over the past year amid trade frictions. The rupee strengthened 1.4% to close at 90.27 per dollar, according to Bloomberg data. Intraday, the local currency surged as much as 1.6% to 90.05, becoming the best performing unit in Asia.
The US will slash reciprocal tariffs on Indian goods to 18% from 25% and eliminate the additional 25% duty linked to the purchases of Russian crude oil. The trade deal will be "effective immediately", President Donald Trump said, following a phone call with Prime Minister Narendra Modi late Monday, signaling immediate tariff relief for India.
With the tariff reduction, analysts at Nomura estimate that the US effective tariff rate on India should fall to around 14.6% from the prior 33.6%, bringing Indian exporters on par with competitors in Southeast Asia.
The deal will open the door for modest appreciation in rupee, but the pace and extent will depend on RBI intervention thresholds, given the priority of maintaining export competitiveness, according to analysts. Some said foreign inflows may improve at the margin, though a sharp shift is unlikely as global investors remain focused on artificial intelligence, quantum computing, and data-center themes.
Based on the Real Effective Exchange Rate (REER), a key indicator of a country's international competitiveness valuation, the rupee's fair value is estimated to be closer to 88, suggesting further appreciation potential over the next two months, said Abhishek Goenka, founder of FX advisory firm IFA Global. The move is likely to be gradual and volatile and the RBI may intervene intermittently to smooth excessive moves, he added.
India's capital account has been under pressure amid sustained FPI and FDI outflows, contributing to over 5% rupee depreciation in the last 12 months. The agreement provides a timely counterbalance, with the potential to improve balance-of-payments dynamics, enhance systemic liquidity, ease interest rates, and support stronger GDP growth, analysts at Avendus Spark Institutional Equities said in a note.
Nomura projects current account deficit for FY27 at 0.8% of GDP, similar to FY26. As FPI and FDI inflows rise, a balance of payment surplus of $7 billion is projected in FY27.
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