The Indian Rupee (INR) has been performing well after a trade agreement between the US and India. This deal includes lower tariffs and is expected to ease pressure on the INR. The Reserve Bank of India (RBI) is likely to keep its policy rate steady, with potential cuts in the future.
Thanks to the trade deal, the INR saw improvements, with the exchange rate of USD/INR falling over 1.5% after reaching a peak of 92.00. This agreement lightens the load on the INR and gives the RBI more flexibility for future policy adjustments.
Expected Changes to Policy Rates
There’s an expectation of a 25 basis point cut to the policy rate, bringing it down to 5.00%. India’s core inflation is now close to the lower end of the RBI’s target range of 2% to 6%, and the current fiscal policy is somewhat restrictive.
Looking back to 2025, we remember how the trade deal between the US and India helped strengthen the rupee and lowered USD/INR from a record high of 92.00. That agreement lifted a major burden on the currency and was viewed as a signal for the RBI to relax its policies further.
However, the RBI’s ability to ease its policies has diminished since then. The central bank reduced the policy rate to 4.75% in late 2025. However, data from January 2026 shows that core inflation jumped to 5.8%, nearing the upper limit of the RBI’s target range. This changes the outlook for future rate decisions significantly.
Economic Challenges and Market Volatility
The advantages of the trade deal are evident, as official data shows that trade between the two countries rose by 12% in the year following the agreement. Still, the rupee hasn’t maintained all its value, and USD/INR is currently around 91.50. This indicates a new tension between strong trade and rising inflation concerns domestically.
Because of this situation, implied volatility in USD/INR options is at multi-month lows, suggesting the market is somewhat relaxed. This might be a good time to buy long-dated call options as a hedge against potential weakness of the rupee if the RBI needs to take stronger actions on inflation than expected. A simple long straddle strategy could also help capitalize on any significant movement in either direction as these economic forces play out.
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