The Indian rupee is poised to begin trading higher following the Diwali break, buoyed by positive cues from the non-deliverable forward market. Market participants are keenly awaiting news flow regarding a potential trade deal between the United States and India, which is expected to significantly influence the currency's trajectory.
US-India Trade Deal in Focus
Reports suggest that India and the United States are nearing the finalization of a long-awaited trade agreement. The deal could see the United States reduce tariffs on Indian exports from the current levels of around 50% to approximately 15-16%. In return, India may consider gradually reducing its imports of Russian oil and increasing imports of certain US agricultural products, such as non-genetically modified corn and soymeal.
The proposed agreement focuses primarily on the energy and agriculture sectors. India might allow higher imports of US agricultural products, addressing long-standing US concerns about access to India's agricultural market. The deal may also include a system for regular tariff and market access reviews to ensure balanced trade terms.
Potential Impact of the Trade Deal
A reduction in US tariffs could make Indian exports, particularly in sectors like textiles, engineering goods, and pharmaceuticals, more competitive in the American market. Trade experts believe the tariff reductions could substantially boost Indian exporters while providing US companies with greater access to India's rapidly growing consumer market. The deal is part of a broader strategy to double India-U.S. trade to $500 billion by 2030.
Rupee and Influencing Factors
The Indian rupee's exchange rate is influenced by a complex interplay of factors, including the strength of the US dollar, domestic monetary policy, economic growth, inflation, trade deficits, and political stability. Foreign exchange rates play a vital role in the global economy, influencing the real return on trades. The rupee's value fluctuates based on the demand and supply for the currency, trade relations, and geopolitical scenarios.
Foreign investment flows also significantly impact the exchange rate. When global investors purchase Indian stocks or bonds, they bring in foreign currency, increasing demand for the rupee and strengthening its value. Interest rates also play a crucial role; higher interest rates attract foreign investment, leading to increased demand for the rupee and appreciation in its value.
Market Sentiment and Global Cues
The GIFT Nifty, an indicator of Indian market trends, has shown positive movement, reflecting optimism surrounding the potential trade deal. However, traders will be closely monitoring global cues, including crude oil prices, gold prices, and currency movements. Asian markets opened lower on Thursday, with Japan's Nikkei 225 and South Korea's Kospi both experiencing declines.
Historical Context
Since India's independence in 1947, the rupee has transitioned from a fixed exchange rate regime to a free-floating system. The rupee's value has changed significantly over the years, influenced by various economic events, including wars, oil crises, and economic reforms. In March 1993, the fixed regime was discarded, and the rupee became free floating, which means its exchange rate is determined by the market instead of the government.
Looking Ahead
The Indian rupee is expected to open higher, with market participants closely monitoring developments related to the US-India trade deal. The potential agreement could have a significant impact on the rupee's value and overall trade relations between the two countries.
