Indian government bonds experienced a surge on Tuesday following the announcement of a new trade pact between the U.S. and India. This agreement triggered fresh buying activity in the bond market. However, the gains were limited due to profit-taking in a market already saturated with supply.
U.S. President Donald Trump announced the long-awaited trade deal late Monday. The agreement involves Washington reducing tariffs on Indian goods to 18%, giving India a competitive advantage over other export-oriented nations in the region, including China, Indonesia, Vietnam, and Bangladesh.
An Indian official revealed that the trade deal encompasses "some" agricultural products, which was later promoted by a Trump aide as beneficial for American farmers. The official also mentioned ongoing discussions with the U.S. for a more comprehensive trade agreement. The revised tariff structure positions India favorably compared to Indonesia (19% tariffs) and Bangladesh and Vietnam (20% tariffs).
Analysts at HDFC Bank noted that the initial market reaction included a strong rupee rally and positive spillover effects in the bond market, alleviating near-term pressure on the currency. They predict the rupee will trade between 89 and 91.50 over the quarter, with a range of 90-92 expected for FY27, assuming the RBI manages dollar flows to curb excessive appreciation.
Sudarshan Venu, Chairman at TVS Motor Company, emphasized the importance of progressively lowering tariffs and non-tariff barriers to deepen supply-chain integration, accelerate technology collaboration, and attract investment in advanced manufacturing. He noted that India has secured several strategic trade deals with key economic partners, which, in a challenging global environment, promotes predictability and openness in trade, helping Indian industry scale, innovate, and create jobs. He expressed optimism for a stronger India-U.S. partnership.
The rally's gains were capped due to a supply-heavy market and profit-taking. Investors are also looking ahead to the upcoming Reserve Bank of India (RBI) meeting, anticipating potential policy decisions that could influence bond yields. The market is closely watching the RBI's stance on inflation and liquidity management, as these factors will likely dictate the direction of bond yields in the near term.