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Rupee assets including the currency, equity and bond markets have fared well this month, with focus likely to shift to tariff announcements due early next week. Rupee rallied in the last two weeks, shaking off its initial hesitation to join the AXJ pack when the US dollar declined sharply. Breaking above 86.00, the rupee has erased its year-to-date losses, benefiting from a resumption in foreign inflows into the equity as well as debt markets, helped also by a likely current account surplus in 1Q25. The currency’s relative underperformance between Dec24 and early-Mar25 had helped to arrest its overvaluation on real effective exchange rate (REER) basis. INR REER returned to its long-term average range in February 2025 (at 102.40) vs a record high of 108.1 in November 2024, suggesting that the rupee is more evenly valued now vs past few years. While fiscal-year end (i.e. Mar) tailwinds might also be propping the currency, the recent rally signals increased scope for two-way move in the USDINR, and therefore higher volatility. Benign crude prices have also set a more favourable backdrop. Bonds have gained from expectations of further rate cuts and steady bond purchases under the ongoing open market operations. Borrowing calendar for 1HFY26 is due today, with the tenor mix likely to shift to 5-15y rather than the longer than 30y papers where demand has been relatively tepid. We look for a rate cut and change in stance to accommodative at the April meeting.
Ahead of the US reciprocal tariff announcement next week, media reports suggest that the government is looking to reach some common ground with the US team visiting India. According to press reports, this includes a) India’s expressed openness to cut or scrap tariffs on about 55% of US imports (~worth $23bn) which face tariffs ranging 5% to 30% in the first phase of the trade deal, according to Reuters; b) lower tariffs on selected US agri imports but exclude key segments like wheat, dairy etc.; c) explore tariff reforms including broadly lower tariffs in the medium-term; d) provide relief to US tech players by removing the digital advertising tax, which was deemed ‘discriminatory and unreasonable’ by the US authorities in the past; e) negotiations on the Bilateral Trade Agreement (BTA), with the initial contours to be released before the first tranche in Fall of 2025. The proposed BTA might include terms to lower bilateral tariffs and non-tariff barriers, improve market access, a commitment from India to step up purchases from the US and target bilateral trade to rise to $500bn within this decade. While official comments from the US still suggest that India might be part of the reciprocal tariffs, we will watch this space carefully to gauge if India manages to receive some reprieve on this front. Any adverse or aggressive tariff announcement will limit the room for further rupee gains. 
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