Improved forex market sentiment following the US-India trade deal could allow the Reserve Bank of India (RBI) to reduce its heavy forex interventions, experts said.
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JOTHI RAMALINGAM B
With improved forex market sentiment in the wake of the US-India trade deal, the RBI is expected to scale back its forex interventions aimed at reducing volatility in the rupee-dollar exchange rate. This, in turn, will improve rupee liquidity in the banking system, say experts.
The RBI has intervened heavily in the forex market through dollar sales over the last few months in the wake of continuous FPI selling in the Indian equity and debt markets. This action has sucked rupee liquidity out of the banking system.
To overcome the resulting liquidity crunch, the central bank has been conducting open market operations, purchasing government securities (G-Secs), conducting USD/INR buy-sell swaps, and conducting variable rate repo auctions.
Madan Sabnavis, Chief Economist at Bank of Baroda, observed that the US-India tariff deal will be helpful for the RBI from a currency perspective. The RBI does not have to worry about it.
“One of the factors which was pushing the rupee down was absence of a trade deal. Now that supposedly there is a trade deal in place, this itself will bring in certainty and there will be more FPIs coming in and the rupee should be back to the 89-90 level,” he said.
Rajani Sinha, Chief Economist, CareEdge Ratings, said easing of the trade uncertainty is likely to support a revival in foreign investment inflows, providing greater stability to the rupee. This could allow the RBI to scale back its forex interventions, which had intensified over the past few months amid heightened volatility.
Furthermore, with a stable rupee, the RBI could better support the government’s borrowing plans and domestic liquidity conditions through a larger volume of open market operations.
HDFC Bank’s Economic Research team, led by Sakshi Gupta, Principal Economist, in a report, said they anticipate the “sentiment effect” from the US-India tariff deal to ease the downward pressure on the rupee in the near term and shift their forecast range for the rupee for FY27 downward.
However, once the initial euphoria settles down, they cautioned that the details of the trade agreement remain important.
“We see the [USD/INR] pair between a range of 89.00-91.50 over the quarter, supported by the positive trade deal announcement and improvement in seasonal capital inflows. For FY27, we estimate a range of 90-92 for the pair, factoring in a moderate depreciation pace.
“This is assuming that the RBI might absorb dollar flows to manage its forward book maturity [estimated at $62 billion as of December end, can be higher if one includes the $20 billion swap for January and February] and in turn limit the appreciation pressure on the rupee. Our forecasts for FY27 can be influenced by the details of the trade deal announcement,” said the HDFC Bank economists.
Published on February 3, 2026
