India-US Trade Deal Reports Fuel Sharp Rally in Rupee and Bonds
Reports of an agreement between India and the United States on a trade deal sparked a significant rally in the rupee and government bonds on Tuesday, lifting overall market sentiment despite the absence of detailed official disclosures. The positive news provided a much-needed boost to financial markets, which had been grappling with recent pressures.
Rupee Posts Strongest Single-Day Gain in Seven Years
The Indian rupee jumped by 124 paise to reach 90.27 against the US dollar, marking its strongest single-day gain in seven years and the best performance since late 2018. This surge followed a previous session close at 91.51, with the currency strengthening by 165 paise over two consecutive days. The rebound is particularly notable as it comes after the rupee recently hit a record low of 91.99, driven by corporate dollar hedging activities and concerns over capital outflows that had weighed heavily on the currency.
Sakshi Gupta, an economist at HDFC Bank, commented on the outlook, stating, "We see the pair trading within a range of 89-91.50 over the quarter, supported by the positive trade deal announcement and an improvement in seasonal capital inflows. For FY27, we estimate a range of 90-92 for the pair, factoring in a moderate pace of depreciation."
Market Sentiment Shifts as Speculative Bets Unwind
Market participants noted that the improved mood led to the unwinding of speculative bets against the rupee, including long dollar positions in offshore markets. Expectations of equity-related inflows also provided support to spot trading activities. Forward indicators reflected this shift, with short-term forward points and premiums easing, while options pricing showed a lower cost of positioning against the rupee.
In response to the developments, currency forecasts were revised stronger. End-March 2026 projections were cut to 89.5 per dollar, and end-2026 estimates were lowered to 93, indicating increased confidence in the rupee's stability and potential appreciation.
Government Bonds Firm Amid Positive Sentiment
Government bonds also firmed, tracking the positive sentiment from the trade deal reports. The 10-year benchmark yield fell by approximately 4 basis points to around 6.72%. However, gains were somewhat capped as the move provided an opportunity for profit-taking in a market still grappling with weak demand-supply dynamics.
Bond prices have remained under pressure since the Union Budget projected record market borrowings for FY27, creating a challenging environment for sustained rallies. Despite this, the temporary boost from the trade deal news offered a respite and highlighted the sensitivity of Indian financial markets to international trade developments.
The rally underscores how geopolitical and economic agreements can swiftly influence currency and bond markets, even in the absence of full details, as investors react to potential improvements in trade relations and economic outlook.
