Rupee Strengthens on Dollar Weakness, E.U Trade Deal Hopes

On Tuesday, January 27, rupee increased by 0.13% at 91.8225 against the U.S. dollar due to the weakening of the dollar and an increase in expectation of an announcement regarding a trade agreement between India and the European Union (E.U). The Indian Rupee had recently fallen to its historically lowest point of 91.9650 earlier in the week, but it has regained some value. 

Invest in Indian Markets and Unlock Future Potential With 5paisa!

Open Account Now

The Dollar Index has not reached its lowest point in the last four months, and the Indian Stock Market has also seen an increase of 0.1%. Information surrounding the anticipated trade agreement between India and the E.U reduces the amount of speculation against the Rupee.

Despite the regular daily increases of FDI, the inflows have not improved much compared to the previous year.

E.U Trade Pact Lifts Sentiment

Sentiment is increasing due to the anticipated announcement of the India-EU Trade Pact on January 27. The completed Deal between India and the E.U. is expected to significantly reduce duties on imports, i.e. cars and wines from Europe, and increase import opportunities for Indian produced goods, including electronics, textiles, & chemicals via the EU market.

Expectations regarding the forthcoming positive impacts of the trade agreement could likely deter new short selling in the Rupee until the announcement is made. The Reserve Bank of India could intervene to prevent the Rupee from falling to an all-time low when the trade agreement news is announced.

Scott Bessent, the current Treasury Secretary for the United States, had stated that if the Government of India can continue reducing its importation of Russian-sourced crude oil, then the U.S. could see a major reduction in the 25% tariffs placed on Indian goods. 

Persistent Flow Imbalances

Foreign investment withdrawals remain a significant negative driver of currency movements as importers utilise significant hedging while export sector market players postpone dollar selling, thereby skewing the dollar flowing out negatively.

Increased speculative concerns ahead of potential announcements regarding trade agreements are compounding the stress caused by ongoing gradual depreciation expectations, with 92.50 remaining as the immediate support level. 

Technical Outlook and RBI Role

The 92.00 price level is currently seen as a major near-term pivot for the rupee, where a sustained move above this price point should provide momentum toward the 92.20-92.50 range. 

The interventions made by the central bank over time are intended to counteract these pressures on currency movements toward 90.80-91.00 levels. Continued progress on trade agreements will also help offset the impact of the stronger U.S. dollar. 

While the Equity Markets are recovering due to optimism over a potential trade deal, the dynamics of tariffs across the globe, as well as other domestic flows, will continue to shape the direction of the INR.

Implementing a trade agreement will provide further bilateral opportunities, allowing RBI to balance its intervention with market conditions.

The daily gain registered by the rupee indicates that the momentum arising from an impending trade agreement is able to outweigh the negative forces of continuous, gradual depreciation. The exact results of these trade agreements will dictate the exact direction taken in the near term.