A Trade Pact with Currency Implications
As India and the United States reset their trade relationship in early 2026, markets are asking a critical macroeconomic question: can this deal help stabilise the rupee and rekindle foreign investment inflows? With the Indian currency under pressure for much of 2025 and capital flows turning volatile, the tariff rollback announced in February has quickly become more than a trade story—it is now a test case for macroeconomic confidence.
Why the Deal Matters Beyond Trade
The US–India trade agreement reduces reciprocal US tariffs on Indian goods from 25%—and in some cases an effective 50% including penalties—to a flat 18%. This change directly affects exports to India’s largest single-country market, which absorbs nearly $87 billion worth of Indian goods annually.
The timing is significant. India entered 2026 with a widening current account deficit (CAD), a weakening rupee hovering near 90–91 per dollar, and sizeable foreign portfolio investor (FPI) outflows in the previous year. By easing pressure on exports and improving visibility on trade flows, the deal offers a potential macro stabiliser at a fragile moment.
Trade Deal and the Rupee: Transmission Channels
The impact of the agreement on the rupee in 2026 will largely operate through three interconnected channels: trade balance improvement, capital flows, and energy cost stability.
· Export Revival and CAD Compression
Higher tariffs had sharply reduced Indian exports to the US in late 2025, worsening the trade deficit and pushing the CAD above 2% of GDP. The removal of the Russia-linked penalty tariff and the reduction of baseline duties are expected to revive shipments across engineering goods, textiles, pharmaceuticals, and chemicals. Analysts estimate that a sustained export recovery could narrow the CAD toward the 1–1.5% range by mid-2026, directly supporting the rupee.
· Capital Flows and Investor Sentiment
India saw over $17 billion in net FPI outflows in 2025, amplifying currency weakness. The trade deal has already improved risk sentiment, reflected in a sharp rally in GIFT Nifty futures and renewed interest in export-oriented equities. A more predictable trade regime with the US strengthens India’s medium-term growth narrative, making rupee assets more attractive to global investors and supporting portfolio and FDI inflows.
Energy Diversification and FX Stability
Although not formally binding, US statements around expanded energy trade signal gradual diversification away from heavily discounted Russian crude. Even partial shifts toward US LNG or oil can reduce volatility in India’s import bill. Lower energy price shocks help stabilise dollar demand, easing pressure on the rupee during periods of global uncertainty.
Rupee Outlook for 2026: What the Numbers Suggest
In the short term, the rupee has already shown modest appreciation following the announcement, strengthening by around 0.5–1%. Currency strategists now expect the INR to trade in the 88–90 range in early 2026, compared to pre-deal forecasts of 91–93.
Looking ahead, a combination of export recovery, improving services surplus, and renewed capital inflows could push the rupee toward 86–88 by the second half of 2026. The Reserve Bank of India’s sizeable foreign exchange reserves—around $650 billion—add an additional buffer, allowing calibrated intervention without undermining growth.
Risks That Could Temper Gains
The stabilising effect is not guaranteed. Delays in formalising the trade framework, global monetary tightening, or sharp oil price spikes could reintroduce volatility. Moreover, large long-term purchase commitments under the deal may strain fiscal balances if not carefully phased.
A Cushion, not a Cure
The India–US trade deal is unlikely to transform the rupee overnight, but it meaningfully improves the balance of risks in 2026. By supporting exports, restoring investor confidence, and reducing external vulnerabilities, it offers the currency a stabilising cushion after a difficult year. If complemented by steady policy execution and benign global conditions, the agreement could help shift the rupee from chronic weakness toward relative resilience—an outcome markets will watch closely in the months ahead.
(With agency inputs)
