India-US Trade Deal Hopes Spur Rupee Stability Bets

India's central bank is optimistic about clinching a favorable trade deal with the United States that could ease pressure on the rupee. Reserve Bank of India Governor Sanjay Malhotra emphasized that the "good trade deal" would help reduce trade deficit concerns and stabilize the currency. He made these remarks during a speech at the Delhi School of Economics, highlighting confidence in upcoming negotiations according to reports.

The rupee has remained near its record low of 88.8050 against the dollar since October, supported by central bank interventions. Recent currency depreciation has been attributed to trade-related pressures and expectations of a wider deficit due to U.S. tariffs. Malhotra, however, downplayed concerns, stating the RBI has sufficient foreign exchange buffers to manage external pressures as per the report.

The central bank has not targeted a specific rupee level, and Malhotra explained that recent depreciation was driven by dollar demand. He assured that India's foreign exchange reserves are robust and that the RBI prioritizes financial stability over fixing the currency at a particular rate according to the report.

Trade Negotiations and Tariff Resolutions

India and the United States have been in discussions to resolve 50% tariffs imposed by President Donald Trump on Indian exports, partly in response to India's purchases of Russian oil. Commerce Secretary Rajesh Agrawal said the first phase of the trade deal, focusing on reciprocal tariffs, is "more or less near closure" according to reports. A deal that reduces these tariffs and opens U.S. markets for Indian exports could strengthen the rupee and ease current account pressures as research shows.

The U.S. tariffs have already taken a toll on Indian exports, which fell to $34.38 billion in October 2025, a 11.8% decline from the previous year. Exports to the U.S. dropped nearly 9% to $6.31 billion amid the high tariffs, impacting sectors like textiles, shrimp, and gems and jewelry according to data. A reduction in these trade barriers could reverse this trend and improve export competitiveness.

Market Reactions and Economic Implications

The rupee closed at 88.71 against the dollar on Thursday, influenced by strong dollar demand and diminishing hopes of a U.S. Federal Reserve rate cut. Market traders noted that the greenback gained momentum after Fed minutes revealed that most officials opposed a rate reduction in December according to reports. A favorable trade deal could bolster investor confidence and potentially strengthen the rupee toward 86.5 or 87.5 as analysts project.

India's trade deficit widened to a record $41.68 billion in October, driven by a surge in gold and silver imports. Gold imports alone jumped to $14.72 billion, reflecting strong demand during the festival season. Analysts at HSBC noted that the current-account deficit is expected to widen significantly for the year, with the rupee potentially acting as an automatic stabilizer as research indicates. However, a trade agreement could ease these pressures and support economic recovery.

Policy Outlook and Rate Cuts

The Reserve Bank of India remains focused on managing inflation, which recently dropped to a record low of 5.02% in October. Governor Malhotra emphasized the importance of a flexible inflation target due to the large weight of food in the CPI basket. With inflation expected to remain near 4%, the RBI is seen as likely to cut interest rates in December and early next year according to reports.

Morgan Stanley expects the RBI to cut the repo rate by 25 basis points in December, bringing the policy rate to 5.25%. The bank anticipates a data-dependent approach in subsequent months as it monitors inflation and growth signals. A reduction in interest rates could stimulate domestic demand and support economic activity, especially in sectors hit by the trade deficit and global slowdown according to market analysis.

Looking Ahead

The resolution of U.S. tariffs and a successful trade agreement could reshape India's trade dynamics and provide a long-term boost to economic growth. A balanced deal that eases export tariffs while protecting domestic industries will be crucial for India. The RBI will continue to monitor the rupee's movements and intervene as necessary to ensure stability without targeting a fixed exchange rate.

As negotiations proceed, investors and analysts will closely watch the final terms of the agreement and the RBI's response to shifting market conditions. The coming months will be critical in determining whether India can leverage this trade deal to stabilize the rupee, reduce the trade deficit, and strengthen its position in global markets.