The Indian Rupee (INR) clawed back early losses against the US Dollar (USD) on Friday, supported by renewed optimism surrounding a potential US-India trade deal. The USD/INR currency pair dropped to near 88.20 in late trading hours in India, reversing earlier intraday losses.
This movement reflects growing investor confidence as trade tensions between the two countries show signs of easing. The experts at LFtrade, including Lily Chan, break down the subject step by step in their latest article.
Indian Rupee Recovers Against US Dollar
During Friday’s trading session, the INR recovered after early losses, driven by positive market sentiment linked to remarks from India’s Chief Economic Adviser (CEA), V. Anantha Nageswaran.
He indicated that discussions between Washington and New Delhi are actively moving forward and suggested that a resolution to the ongoing tariff dispute could be reached within the next few months. This outlook has strengthened market confidence, boosting demand for the Indian Rupee and exerting downward pressure on the USD/INR pair.
US-India Trade Relations: Tariff Reduction Prospects
The recent US-India trade tensions began when Washington imposed an extra 25% tariff on Indian imports in early August. The US cited India’s purchase of Russian oil as indirectly funding Moscow’s war efforts in Ukraine.
However, the latest comments from Nageswaran indicate a potential rollback of these tariffs, with expectations that the reciprocal tariffs could be reduced to between 10% and 15%. Such a move would provide a significant boost to Indian exports and restore the competitiveness of India-made products in the global market.
Market participants are closely monitoring these developments, as a successful trade deal could reverse some of the negative sentiment that has affected foreign investment flows into India.
Impact on Foreign Institutional Investors
The ongoing trade tensions have already had tangible effects on Foreign Institutional Investors (FIIs). Since July 1, FIIs have reduced their holdings in Indian equity markets by Rs. 1,05,532 crores, reflecting concerns over tariff barriers and the potential economic impact on Indian companies.
Renewed optimism regarding a US-India trade resolution could lead to rebound inflows, benefiting both the equity and currency markets. Analysts highlight that a reduction in US tariffs would likely encourage investor confidence, positively influencing portfolio allocations towards Indian assets.
Supporting Macroeconomic Data
Adding to the positive market sentiment, US economic data released on Thursday also played a role. The US Initial Jobless Claims for the week ending September 13 came in lower at 231,000, below market expectations.
This data suggests a resilient US labor market, which supports sustainable economic growth and creates a favorable backdrop for bilateral trade negotiations. Investors often interpret such macro indicators alongside trade developments, influencing currency volatility and cross-border capital flows.
Technical Perspective on USD/INR
From a technical analysis standpoint, the USD/INR pair is showing signs of a corrective decline after hitting short-term highs earlier in the week. The drop to 88.20 indicates a potential support level, with traders reacting to the optimistic trade commentary.
If tariff reductions materialize as projected, analysts expect further downside pressure on USD/INR, potentially testing levels near 87.80–88.00 in the coming sessions. Conversely, renewed trade uncertainties or delays in negotiations could trigger reversals, keeping the pair volatile.
USD/INR Sensitivity to Trade Negotiations and Investor Sentiment
The USD/INR exchange rate remains highly sensitive to updates on US-India trade negotiations and shifts in investor sentiment. Any confirmation of tariff reductions or progress in bilateral talks could trigger further INR appreciation against the US Dollar, while delays or uncertainties may result in renewed volatility.
Traders are particularly watching statements from India’s CEA and US trade officials, as even subtle hints of policy changes can influence capital inflows, FIIs participation, and short-term currency trends. Maintaining vigilance on these developments is crucial for forex market participants and export-oriented businesses.
Outlook for Indian Exports
A resolution of the 25% US tariff would have a profound impact on India’s export sector. Industries such as textiles, engineering goods, and automotive components stand to benefit from lower trade barriers, potentially driving higher export volumes.
Additionally, improved trade relations could attract renewed foreign direct investment (FDI), enhancing India’s global trade positioning and supporting the INR’s medium-term strength.
Conclusion
The Indian Rupee has demonstrated resilience, recovering early losses against the US Dollar as optimism about a US-India trade deal grows. CEA Nageswaran’s comments regarding potential tariff reductions and ongoing government-level discussions have provided a positive catalyst for the currency markets.
While the USD/INR pair may continue to experience intraday volatility, the combination of optimistic trade developments and supportive US economic data positions the Indian Rupee for potential gains. Investors and market participants will continue to monitor tariff resolutions, foreign capital flows, and macroeconomic indicators closely, as these factors will remain central to INR performance in the near term.
