INDIA RUPEE-US-India trade breakthrough flips the script on rupee fortune indicators

By Jaspreet Kalra and Nimesh Vora

MUMBAI, Feb 3 (Reuters) - The Indian rupee soared on Tuesday after New Delhi and Washington announced a trade deal that slashed U.S. tariffs on Indian goods, a development that turned around indicators that previously pointed to sustained weakness in the currency.

Before the deal was announced overnight on Monday, the rupee was caught in a persistent trend of depreciation. The currency slumped by about 5% since the tariffs went into effect in late August.

The rupee INR=IN recovered sharply on Tuesday and was last up nearly 1.2%, on course for its biggest one-day gain in over three years. Concurrently, indicators that help investors gauge the future trajectory turned in the currency's favour.

The one-month non-deliverable forward points, which help gauge the path market participants expect the currency to take in the future, dropped to 8 paisa, their lowest level in over 3 months.

Dollar-rupee forward premiums, which capture the cost of hedging against further rupee weakness, dipped across tenors. The 1-month forward premium dropped to its lowest level since September 2025 and the 1-year implied yield dropped below 2.50%.

Concurrently, the 1-month 25 delta dollar-rupee risk reversal, the volatility gauge, came off a multi-week high. The decline signals that the cost of betting against the rupee via options has fallen relative to the cost of wagering on its rally.

"Our view has been that the INR is now slightly undervalued and can therefore partially recover on a rollback in U.S. tariffs, especially as the reprieve coincides with "positive seasonality" in India's balance of payments in the January-March quarter," said Joey Chew, head of Asia FX research at HSBC in Singapore.

The firm expects the rupee to strengthen to 88 by the end of March and then fall back to 90 by end 2026.

Indian equities rallied sharply as well, with the benchmark Nifty 50 .NSEI up nearly 3%. The yield on the 10-year benchmark bond eased 5 bps to 6.72%.