Rupee Rallies Amid Trade Pact and Economic Resilience

On Tuesday, the Indian rupee showcased a notable rally, starting the trading session at 84.65 against the US dollar, a substantial increase of 75 paise from its last closing at 85.38 per dollar. This improvement came amidst anticipation of the trading range for the day lying between 84.50 and 85.25, as forecasted by market experts. The strengthening of the dollar was further supported by a significant trade agreement reached between the US and China, which encompasses the US reducing tariffs on Chinese products from 145% to 30% for a period of 90 days. Concurrently, China has agreed to lower tariffs on American goods from 125% to 10% for the same duration. This bilateral pact also includes the establishment of a mechanism for ongoing discussions on economic and trade relations between the two nations.

Analysts predict that any new developments in geopolitical affairs could play a crucial role in determining the future trajectory of the Indian rupee. Over the fiscal year 2025, the rupee experienced fluctuations, trading between 83.10 and 87.6 against the US dollar. Following the US election outcomes, the currency initially faced depreciation, losing 2.4% in value over the year, largely due to continuous foreign portfolio investor (FPI) outflows and the strength of the US dollar. However, despite these adversities, the rupee managed to maintain relative stability in comparison to other global currencies. This resilience is attributed to India's robust government finances, a shrinking current account deficit, enhanced liquidity conditions, and moderating oil prices, as outlined in the NSE's ‘Market Pulse Report’ for April.

Towards the fiscal year's close, a weakening of the US dollar and a resurgence of FPI inflows into Indian debt markets allowed the rupee to recuperate, gaining 2.4% in March 2025. The rupee's average annual volatility was recorded at 2.7% for FY25, making it one of the least volatile among major emerging market currencies. This is a testament to India's solid external financial position and effective foreign exchange management strategies. The report further elaborates, "However, the rupee remained overvalued, with the 40-currency trade weighted REER rising to 105.3, although both REER and NEER moderated gradually from H1FY25, indicating an easing of overvaluation. The one-year forward premium for the rupee continued to moderate, reflecting changing premium dynamics and India's macroeconomic resilience."

In conclusion, the Indian rupee demonstrated a notable performance, influenced by international trade dynamics and domestic economic factors. Its ability to remain stable amid global currency fluctuations underscores the effectiveness of India's economic policies and forex management practices.