US-India Trade Deal: A Mixed Bag for Economic Outlook
The recently announced US-India trade deal, effective immediately, has slashed tariffs on Indian goods entering the United States from 50% to 18%. This significant reduction is poised to reshape India's economic landscape, influencing key factors such as the rupee, GDP growth, and interest rates. While the move is broadly positive for domestic growth, it introduces complexities that could affect monetary policy decisions by the Reserve Bank of India (RBI).
Tariff Reduction and Export Boost
According to economists, the effective US import duty on Indian products could fall to between 12% and 16%, down from the previous 35-36%. This decline is attributed to concessions in sectors like electronics, pharmaceuticals, and food items such as spices, coffee, and tea, as well as adjustments to Section 232 tariffs on steel, aluminum, and automobiles. The lower tariffs are expected to provide substantial relief to India's export sector, particularly in labour-intensive industries like gems and jewellery, textiles, agricultural products, and engineering goods.
Positive Consequences for Trade and Jobs
Higher exports to the US, India's largest merchandise export destination accounting for nearly a fifth of all shipments, should help narrow the merchandise trade deficit. This deficit had peaked at $41.7 billion in October 2025 before easing to $25 billion by December 2025. Enhanced export activity, especially in key sectors like textiles, is anticipated to improve job conditions over time, potentially returning to pre-August 2025 levels. As a result, economists, including Chief Economic Advisor V Anantha Nageswaran, foresee upward revisions to growth forecasts in the coming months. The Economic Survey had projected GDP growth for FY27 in the range of 6.8-7.2%, a dip from the current year's 7.4%.
Implications for RBI Monetary Policy
However, the improved growth outlook following the tariff cut weakens the argument for further interest rate reductions by the RBI. The Monetary Policy Committee is set to announce its decision on Friday, and analysts from BofA Securities, Rahul Bajoria and Smriti Mehra, have shifted their stance from a 25 basis point rate cut to a hold for the upcoming February 6 meeting. They noted that the deal boosts growth certainty and sustains momentum in high-frequency indicators, suggesting that the RBI, which has already implemented 125 basis points of cuts in 2025, may be done with rate reductions for now. The policy repo rate currently stands at 5.25%.
Rupee and Capital Flows: Short-Term Gains, Long-Term Uncertainty
The trade deal has already had a tangible impact on market sentiment. Indian stock markets closed over 2% higher on Tuesday, reversing post-Budget losses linked to the Securities Transaction Tax hike, while the rupee strengthened by more than 1% against the US dollar. The rupee had faced pressure due to delays in finalizing the agreement, crossing 90 and 91 per dollar in December 2025 and nearing 92 per dollar last week. It closed at 90.27 per dollar on Tuesday, with HSBC analysts describing it as "slightly undervalued" and expecting further appreciation to 88 per dollar by end-March.
Despite these short-term gains, the long-term outlook for the rupee remains unclear. Factors contributing to its 7% depreciation in 2025, such as Foreign Portfolio Investor (FPI) outflows of nearly $12 billion from August 2025 to January 2026, persist. Mitul Kotecha of Barclays highlighted that "hot money flows" from FPIs are key drivers of the exchange rate, with obstacles like an unexciting earnings season, high valuations, and re-allocation to AI-focused equity markets hindering Indian equities. Additionally, commitments by India to reduce tariffs and non-tariff barriers on US products to zero, potentially involving over $500 billion in American goods, could exert flow pressure on the rupee, as noted by Nomura analysts.
Broader Trade Context and Future Prospects
This deal follows recent agreements with the European Union, Oman, the UK, and New Zealand, signaling a trend that bodes well for India's global export share in the medium term. UBS Chief India Economist Tanvee Gupta Jain emphasized that these Free Trade Agreements (FTAs) could promote economic growth by reducing tariffs, lowering input costs, increasing market access, boosting export competitiveness, and encouraging Foreign Direct Investment (FDI). This, in turn, may enhance manufacturing, create jobs, and expand India's exports over time.
In summary, the US-India trade deal presents a nuanced scenario: it fosters export-led growth and strengthens the rupee in the near term, yet complicates the RBI's monetary policy path and leaves long-term currency stability in question. As details of the agreement unfold, its full impact on India's economic trajectory will become clearer.
