A trade deal between the US and India is not likely before August 1. Recently, Trump said they were “very close” to a deal, but things have changed. Negotiations for a mini trade deal have been happening since June. India is still waiting for a tariff letter from the US, with hopes for a compromise by August 1. If there’s no agreement, India could face 26% tariffs that were announced in April. It’s unclear whether the US will stick to the deadline or keep the current 10% tariffs as talks proceed.

India’s Desired Tariff Changes

India wants the US to eliminate the 26% tariffs and lower duties on steel, aluminum, and cars. In return, India might offer concessions on agriculture, dairy, and certain industrial and petrochemical goods. The goal was to reach a broader trade agreement by September or October. However, not achieving a limited deal could push this timeline back. Given the report that a limited trade deal is unlikely before the August deadline, we should expect increased volatility in Indian markets. The uncertainty about the potential 26% tariffs is concerning, especially since US-India bilateral trade reached a record $191 billion in the 2022-23 fiscal year. Traders should get ready for sharp market movements based on negotiation updates.

Buying Volatility Strategy

This situation calls for a strategy of buying volatility. India’s VIX, which measures expected market fluctuations, is currently low but has spiked in the past during negative global events, like the 2020 market crash. We see potential in buying options, such as straddles on the Nifty 50 index, to profit from significant price changes in either direction as the deadline nears. The currency market will be a key battleground, so we need to keep a close eye on the USD/INR pair. The Indian rupee is near historic lows of about 83.5 to the dollar, and if a deal fails, it could weaken further. Taking a long position on the dollar against the rupee could be a smart hedge or a speculative move in response to the deadlock. For those invested in certain sectors, a defensive approach is advisable. The issues around steel, aluminum, and automobiles make companies in these areas particularly at risk of tariff hikes. We suggest buying protective put options on stocks in these sectors to shield portfolios from a potential downturn if Washington imposes higher duties. Despite the President’s comments about being “very close,” the current situation requires caution. There’s still a chance that the administration could bypass the deadline and keep current tariffs while negotiations continue. This could lead to a relief rally, which is why option strategies that benefit from volatility rather than a simple directional bet seem most appealing in the upcoming weeks. Create your live VT Markets account and start trading now.

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