India-US trade deal explained: Here’s how tariff cuts triggered the Rupee’s strongest rally in years

The Indian rupee strengthened sharply on Tuesday after New Delhi and Washington announced a trade agreement that significantly reduced U.S. tariffs on Indian goods. The development marked a reversal for the currency, which had been under sustained pressure in recent weeks due to higher trade barriers imposed by the United States.

The rally followed an announcement by U.S. President Donald Trump late on Monday confirming that the two countries had reached a deal after discussions with Indian Prime Minister Narendra Modi. The agreement lowered U.S. tariffs on Indian exports and introduced commitments on energy purchases and trade barriers, reshaping market expectations around India’s trade outlook.

President Trump said the United States would reduce tariffs on Indian goods to 18 per cent from a previous level of 50 per cent. The tariff cut was described as part of a reciprocal trade arrangement, reached after a call between Trump and Prime Minister Modi.

In return, India agreed to halt purchases of Russian oil and to reduce trade and non-trade barriers affecting U.S. exports. Trump said India would now buy oil from the United States and could also source energy from Venezuela.

Announcing the decision on his social media platform Truth Social, Trump said the agreement was reached “out of friendship and respect” for Prime Minister Modi and was implemented at his request.

Trump said Prime Minister Modi committed India to “BUY AMERICAN at a much higher level.” According to Trump, India would purchase more than $500 billion worth of U.S. energy products, including coal, along with technology, agricultural goods and other products.

He also said India would move forward to reduce both tariff and non-tariff barriers against the United States to zero. The commitments were framed as part of a broader effort to rebalance trade relations between the two countries under the new agreement.

Before Trump returned to office and raised U.S. tariff rates to double-digit levels last year, India had some of the highest tariffs globally. According to World Trade Organization data, India’s simple applied tariff rate stood at 15.6 per cent, while the effective applied tariff was 8.2 per cent.

The tariff increases imposed by the United States last year altered trade dynamics and placed pressure on India’s exports. These changes also fed into broader concerns about the Indian currency’s outlook.

Prior to the trade deal announcement late Monday, the rupee had been locked in a steady depreciation trend. The currency had declined by around 5 per cent since U.S. tariffs went into effect in late August, reflecting concerns over trade flows and economic impact.

Following confirmation of the agreement, the rupee rebounded strongly. On Tuesday, it was last trading nearly 1.2 per cent higher, putting it on track for its biggest single-day gain in more than three years.

Alongside the sharp spot-market recovery, forward-looking indicators also shifted in favour of the Indian currency. Measures used by investors to assess the rupee’s future path showed improving sentiment after the trade announcement.

One-month non-deliverable forward points, a key gauge of market expectations, fell to 8 paisa. This marked their lowest level in over three months, indicating reduced expectations of further depreciation in the near term.

The combined movement in spot prices and forward indicators suggested that the trade deal had materially altered market perceptions around the rupee’s outlook.