Rupee posts highest single-day gain in 7 years; up 1.38% to settle at 90.27

Rupee posts its biggest single-day gain in seven years as US tariff cut to 18 per cent boosts sentiment and triggers unwinding of speculative short positions

The rupee surged 1.38 per cent on Tuesday to witness its highest single-day gain in seven years after the United States (US) announced tariff cuts from 50 per cent to 18 per cent.

 

The tariff announcement on Monday night boosted the market sentiment and traders unwound their speculative positions against the local currency, said market participants.

 

The local currency settled at 90.27 per dollar, against the previous close of 91.52 per dollar, after touching intraday high of 90.05 against the dollar.

 

The rupee, which was the worst performing Asian currency in 2025 and also in January, was the best performing Asian currency on Tuesday. The easing of tariffs is expected to reverse the trajectory of the rupee, as there will be an appreciation bias in the near term.

 

 

Market participants said the reduction in US tariffs on Indian goods, from 50 per cent to 18 per cent, was far steeper than markets had anticipated. This leaves India favourably placed relative to regional peers such as Pakistan, Indonesia and Thailand, and well below China’s tariff rate of 34 per cent.

 

“The appreciation is both sentiment and fundamental-driven. The sentiment is quite positive post the deal. The market was concerned if a trade deal would ever fructify. It is a significant move from 50 per cent to 18 per cent that's almost like a 32 basis point low, which is a significant number,” said Vikas Jain, head of India fixed income, currencies and commodities trading at Bank of America.

 

“Fundamentally, because of this deal between India and the US, our biggest trade partner, it will help in a significant way to increase exports going forward. This will play positively on FPI flows going forward. And at the same time, exporter hedging which had reduced in the near term, will change as well and so that's why we are positive on dollar rupee going forward,” he added.

 

The market will now track whether the RBI intervenes in the foreign exchange market to resume reserve accumulation, and at what levels such intervention occurs. The market will also eye the direction of FPI flows, whether selling pressure eases or turns into net buying.

 

Additionally, exporters’ behaviour will act as a significant cue, particularly whether there is any change in hedging patterns, including an increase in hedging ratios.

 

“We see the pair between a range of 89.00-91.50 over the quarter, supported by the positive trade deal announcement and improvement in seasonal capital inflows,” a report by HDFC bank said.

 

“For FY27, we estimate a range of 90-92 for the pair, factoring in a moderate pace of depreciation. This is assuming that the RBI might absorb dollar flows to manage its forward book maturity,” the report added.

 

Latest data showed that the outstanding net short dollar position in the rupee forward market fell to $62.35 billion by the end of December, against $66.04 billion by the end of November. Short positions in less than one year fell by around $7 billion, while those in longer than one year tenure rose by around $3 billion.

 

“If capital flows recover in CY26 on the conclusion of the India-US trade deal, which would ease some pressure on the rupee, and result in downside risk to our current USD/INR 12-month forecast of 94,” a Goldman Sachs note said.

 

Meanwhile, government bond market participants said that the rally in the bond market following the trade deal is largely sentiment-driven, as there has been a substantial increase in the government’s borrowing programme with limited visibility on incremental demand from FPIs.

 

As a result, domestic demand alone will have to absorb the elevated gross supply of around ₹30 trillion, which would require yields to move meaningfully higher from current levels.

 

The yield on the benchmark 10-year government bond settled at 6.72 per cent, against the previous close of 6.77 per cent.

 

In the absence of sustained RBI support, the 10-year yield is expected to rise above 7 per cent, potentially moving closer to 7.25 per cent over time, dealers said.

 

“The bond market rally after the trade deal appears to be largely sentiment-led. Government borrowing has risen sharply, while visibility on additional demand from FPIs or other foreign investors remains limited, leaving domestic investors to absorb most of the supply. Without sustained RBI support, the 10-year yield could move above 7 per cent, potentially towards 7.25 per cent, around March–April as supply pressures build,” said a senior executive at a primary dealership.

 

The upcoming MPC meeting is likely to deliver an unchanged outcome, with limited room for further rate cuts and sufficient liquidity already infused. While additional OMO purchases of ₹1 trillion- ₹1.5 trillion could provide some support to yields, current liquidity conditions appear comfortable, aided by government spending, reducing the immediate need for further OMOs. The upward pressure on yields is expected to materialise around March-April, as supply begins to hit the market.