A new trade agreement between the US and India has cut tariffs from 50% to 18%. This change may strengthen the Indian Rupee (INR) in the short term. MUFG now expects the USD/INR exchange rate to reach 89.50 in the first quarter of 2026 and 93.00 by the fourth quarter. This presents an opportunity for increasing Dollar investments. The lower tariffs are likely to temporarily reduce the USD/INR exchange rate. MUFG believes that, in the medium term, the USD/INR will rise again. They suggest that any short-term declines could be good chances for businesses and clients to invest more in USD/INR.

USD/INR Forecast Changes

MUFG has adjusted its forecast, setting targets for USD/INR at 89.50 in early 2026 and 93.00 by the end of that year. This update reflects unexpected inflows of funds, changing earlier expectations of 91.50 and 94.00. The recent trade agreement between the US and India has created a positive but temporary situation for the Indian Rupee. Currently, the USD/INR is testing support around 89.70, which aligns with the new Q1 2026 forecast of 89.50. This short-term strength comes from improved market sentiment and anticipated foreign investments. This positive outlook is backed by data showing a net inflow of over $5 billion into Indian stocks in January 2026, marking the strongest start since 2024. Additionally, minutes from the Reserve Bank of India’s recent meetings acknowledge these better trade conditions. Analysts believe this might allow the Rupee to rise modestly soon. These indicators suggest that the recent dip in USD/INR has solid support for the coming weeks. For those trading derivatives, it may be wise to sell near-term USD/INR call options set to expire in February and March. This allows traders to take advantage of the Rupee’s strength. Any dips toward the 89.50 mark could be a perfect opportunity to buy longer-dated call options and prepare for expected growth later in the year. This strategy captures premium now while setting up for the medium-term outlook.

Medium-Term Outlook

However, we still believe the US dollar will gain strength as the year continues, targeting 93.00 by the fourth quarter. Minutes from the US Federal Reserve’s January meeting indicate a hawkish policy stance, contrasting with the more relaxed approach of the RBI. Looking back to 2025, we saw that ongoing domestic inflation in the US and global risk-averse trends can quickly shift market sentiment toward the dollar. Create your live VT Markets account and start trading now.

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