The Indian rupee delivered its best single-day performance in seven years, surging 1.38% on Tuesday, February 3, 2026, after the United States announced a dramatic tariff reduction on Indian goods. The rupee settled at 90.27 per dollar against the previous close of 91.52 per dollar, after touching an intraday high of 90.05 against the dollar. As per Rediff.com, the currency was the best performing Asian currency on Tuesday, marking a significant turnaround from its position as the worst performing Asian currency in 2025 and January. The tariff announcement on Monday night boosted market sentiment and traders unwound their speculative positions against the local currency.
Finance Minister Nirmala Sitharaman has strongly defended the new India-US trade agreement, dismissing opposition allegations of lack of transparency while assuring that Indian interests, particularly in agriculture and energy sectors, remain protected. When pressed on when complete details would be available, Sitharaman indicated they would emerge through parliamentary processes and public documents, though no specific timeline was provided. "These are not things which are going to remain in closed files. They are public documents," she assured, adding that implementation timelines for various provisions would also be disclosed. The Finance Minister urged restraint in celebrating the deal before full details emerge, stating "Wait for the details. I would not think you should rush to congratulate me."
The Indian rupee is positioned for significant appreciation following the India-US trade deal, with currency experts projecting a move toward the 89-level against the dollar. According to The Economic Times, Jayesh Mehta of DSP Finance shared his outlook on rupee dynamics and foreign portfolio investment (FPI) flows in an interview with ET Now. The rupee's sharp recovery comes after touching near 92-levels just last week, with Mehta projecting the currency could reach the 89-handle within the next four to five days if FPI flows turn positive. As per ETMarkets.com, Mehta stated that "if we see in the next four, five days the flows become positive in India on the FPI side, that should definitely give us a new level of 89 handle."
The market was significantly concerned about the possibility of a trade deal materializing, but the tariff reduction from 50% to 18% represents a 32 basis point decrease that market participants describe as "almost like a 32 basis point low, which is a significant number." As reported by Rediff.com, Vikas Jain, head of India fixed income, currencies and commodities trading at Bank of America, explained that "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 positioned relative to regional peers such as Pakistan, Indonesia and Thailand, and well below China's tariff rate of 34%.
Markets experienced significant volatility following the budget announcement, with the Nifty falling 1,500 points initially before recovering sharply with gains of approximately 2,400 points the following day. Finance Minister Sitharaman has defended the government's decision to raise Securities Transaction Tax (STT) on futures and options trading, revealing that studies show 90% of retail traders were suffering heavy losses in the speculative segment. Speaking about the market's initial drop, Sitharaman emphasized that the STT correction was "much needed" to protect retail investors, noting that "we have had people calling us saying people are losing money heavily." The Finance Minister clarified that the measure was designed to deter speculative trading rather than boost government revenues, with the recovery attributed to her team's clarifications and positive sentiment around potential investment inflows and the Indo-US trade deal.
Opposition parties have raised concerns about transparency and potential impacts of the trade deal, with Leader of Opposition Rahul Gandhi terming the deal "surrender 2.0." The opposition has questioned why major announcements affecting India came first from Washington rather than New Delhi, and raised concerns about US business chambers, think tanks welcoming the India-US deal. Finance Minister Sitharaman attributed delays in sharing agreement details to parliamentary disruptions, with eight opposition MPs suspended following disturbances that included tearing and throwing of papers in the house. The opposition has also questioned the apparent asymmetry where US products may enter India at 0% tariff while Indian exports face an 18% rate.
Despite strong macroeconomic fundamentals, the rupee had been under pressure due to continuous FPI outflows. As reported by The Economic Times, Mehta explained that "the expectation is that starting today and maybe for the next few months, we will see some inflow, or even if we don't see inflow, the outflow would stop." The newly signed trade deal is expected to mark a turning point in foreign investment sentiment, potentially reversing the recent outflow trend. According to ETMarkets.com, the India-US trade agreement appears to have established a floor for the rupee, reversing the currency's recent weakness and establishing conditions for sustained appreciation.
Several technical factors are contributing to the rupee's recovery, according to the analysis reported by The Economic Times. Short covering by market participants who had positioned short on dollar-rupee is unwinding positions, while exporter activity sees exporters who delayed sales entering the market as the rupee strengthens below 90-level. Similar to equity markets, currency positioning is being recalibrated with positioning adjustments occurring across the market. As per ETMarkets.com, market participants who had positioned short on dollar-rupee are unwinding positions, while positioning adjustments are occurring across the market.
HDFC Bank projects the rupee pair will trade between 89.00-91.50 over the quarter, supported by the positive trade deal announcement and improvement in seasonal capital inflows. For FY27, HDFC estimates a range of 90-92 for the pair, factoring in a moderate pace of depreciation. 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, with short positions in less than one year falling by around $7 billion. However, bond market participants remain cautious, with the yield on the benchmark 10-year government bond settling at 6.72% against the previous close of 6.77%, but dealers expect yields to rise towards 7%-7.25% in coming months due to heavy government borrowing.