Indian stocks and the rupee have not performed as well as other emerging markets recently, but they may be about to change. Progress on a trade deal between the US and India, in addition to the agreement with the EU, has sparked optimism in the stock market.
Several factors support this optimism: fiscal discipline, investment in infrastructure, high real yields, and the fact that the rupee is undervalued. Discussions about the US-India trade deal, which may lower US tariffs to 18%, have already caused a rise in Indian stocks.
Undervaluation Of The Rupee
An undervalued rupee offers good potential for returns in foreign exchange. Due to lower inflation pressure, fixed income assets could maintain high real yields, making Indian government bonds attractive to international investors.
Indian stocks did not join the wider emerging market rally in late 2025, indicating we might be close to a turning point. Options on Indian indexes, like the NIFTY 50, could be a smart move in the coming weeks. While the MSCI Emerging Markets Index rose nearly 12% in the last quarter of 2025, the NIFTY 50 only grew by 4%, highlighting a performance gap.
The positive news regarding the US-India trade deal, which looks to cut some tariffs to 18%, has significantly boosted sentiment. This development, alongside the groundwork from the EU trade discussions throughout 2025, creates a favorable environment for buying bullish call spreads. This strategy could help benefit from upward movement while reducing risk, especially in export-oriented sectors that are likely to see stock prices rise.
Rupee Weakness
The weak rupee presents a special opportunity for investors. After dropping to over 85 against the dollar in late 2025, its current undervalued state suggests considering derivatives that gain from a stronger rupee, like USD/INR put options. This allows investors to benefit from India’s positive outlook through both its stocks and currency.
The overall economic picture looks strong, lending credibility to these bullish trades. The Reserve Bank of India successfully reduced inflation towards its 4% target last year, keeping India’s real yields competitive globally. This stability, along with ongoing government spending on infrastructure, lowers risks for those selling out-of-the-money put options to earn premiums.
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