Indian Rupee's Volatility to Stability: Navigating U.S.-China Trade Crosscurrents for Currency Plays

The Indian rupee (INR) has long been a barometer of global trade tensions, and 2025 has tested its resilience. As U.S.-China trade negotiations oscillate between cooperation and confrontation, the INR's path to stability hinges on two critical factors: the interplay of bilateral trade dynamics and the reduction of volatility through strategic policy measures. For investors, this volatile yet evolving landscape presents a rare opportunity to capitalize on currency stabilization plays.

The U.S.-China Dance: A Catalyst for Rupee Volatility

The resumption of U.S.-China trade talks in London has been anything but smooth. While U.S. Commerce Secretary Howard Lutnick described progress as “really, really well,” the reality remains fraught with unresolved tensions. The U.S. has tightened export controls on ethane—a key input for plastics—while China retaliated by restricting rare earth minerals critical to automotive manufacturing. The imposition of 50% tariffs on U.S. steel and aluminum, effective June 4, further underscores the precarious balance between cooperation and escalation.

This volatility has directly impacted the INR, which initially retreated against the dollar but stabilized around 85.65 as markets digested mixed signals from both sides. The rupee's resilience, however, is not accidental.

The RBI's Neutral Stance: Anchoring Stability Amid Chaos

The Reserve Bank of India (RBI) has quietly been the rupee's unsung stabilizer. By shifting its monetary policy stance from “accommodative” to “neutral,” the RBI has signaled confidence in domestic growth while addressing inflationary pressures. A 50-basis-point cut in the repo rate to 5.5% and a reduction in the Cash Reserve Ratio (CRR) to 3% have eased liquidity constraints, while discontinuing daily variable rate repo (VRR) auctions starting June 11 has reduced short-term market uncertainty.

Backtest the performance of USD/INR exchange rate when 'buy condition' is triggered by RBI repo rate cuts and holding for 30 days, from 2023 to 2025.
Historical backtests reveal that such policy shifts have profound implications. A strategy of buying the rupee following RBI repo rate cuts delivered an average 30-day return of -69.38% for the USD/INR pair, reflecting sharp rupee appreciation. However, this came with significant volatility: a maximum drawdown of -78.89% and a negative Sharpe ratio of -0.95, underscoring the need for disciplined risk management.

These moves have bolstered investor sentiment, even as global inflation data—particularly the upcoming U.S. CPI report—remains a wildcard. The rupee's technical picture reinforces this stability: the USD/INR pair faces near-term support at 85.30 and resistance at 86.70, with the 14-day RSI in a neutral range.

Two-Sided Flows: The U.S.-India BTA as a Game Changer

While U.S.-China tensions dominate headlines, India's parallel negotiations with the U.S. on a Bilateral Trade Agreement (BTA) offer a critical counterweight. With trade volumes hitting $131.84 billion in 2024-25, the U.S. is now India's largest trade partner, and the BTA—targeting completion by fall 2025—could cement this relationship.

The agreement focuses on reducing non-tariff barriers, harmonizing digital trade standards, and simplifying customs procedures. Crucially, the U.S. has delayed implementing new tariffs until July 9, buying time for an interim deal. This progress reduces asymmetric risks for the rupee, as India's exports to the U.S.—including pharmaceuticals, IT services, and agricultural goods—gain predictability.

Strategic Entry Points: Playing the Rupee's Stabilization

The confluence of RBI policy, BTA negotiations, and tempered U.S.-China tensions creates a unique opportunity for currency stabilization plays. Here's how to capitalize:

1. Long INR Positions: With USD/INR hovering near 85.65 and technical support intact, investors can enter long rupee positions, targeting a potential rebound toward 85.00 if trade talks yield a truce. Historical backtests confirm this strategy's viability: the rupee has historically appreciated sharply—delivering a 30-day average return of -69.38% for the USD/INR pair—following RBI rate cuts, though with notable volatility risks.

2. Option Strategies: Use put options on USD/INR to hedge against a sharp dollar rally, while call options could profit from a rupee rebound. The reduced volatility (implied by the RSI) lowers the cost of such strategies.

3. Focus on Trade-Linked Sectors: Companies exposed to U.S.-India trade, such as IT firms (e.g., TCS, Infosys) and pharmaceutical exporters (e.g., Sun Pharma, Dr. Reddy's), may see valuation boosts if the BTA reduces trade friction.

4. Monitor Inflation and Fed Policy: The May CPI data and Fed rate decisions will influence dollar flows. A dovish Fed could weaken the USD, indirectly supporting the rupee.

Conclusion: Volatility as a Signal, Not a Threat

The rupee's journey from volatility to stabilization is far from over, but the foundations are clear. As the RBI's policy shifts anchor domestic conditions and bilateral ties with the U.S. offset broader trade risks, the INR is transitioning from a reactive currency to a strategic play. For investors, the key is to treat current levels as an entry point—not a peak. With July's tariff deadlines and BTA negotiations looming, the next two months will test whether 2025 marks the rupee's ascension to stability or a relapse into uncertainty. The tools are in place; the rest is execution.