Whalesbook
1. The Core Catalyst
The Indian Rupee experienced a significant intraday rally on Tuesday, February 3, 2026, appreciating by 1.36% to close at 90.27 against the US dollar. This marked the steepest single-day gain for the domestic currency since December 2018. The immediate driver was US President Donald Trump's announcement of a reduction in reciprocal tariffs on Indian goods to 18%. This move effectively removed a significant overhang that had pressured Indian assets, including stocks and bonds. For the day, the rupee outperformed other Asian currencies, with the Malaysian ringgit gaining 0.34% and the Indonesian rupiah adding 0.19%. However, this sharp recovery did little to alter the rupee's standing as the worst performer among Asian currencies for the fiscal year 2026, having depreciated over 7% prior to this announcement.
2. The Analytical Deep Dive
While the tariff reduction provides a much-needed reprieve, analysts caution that its impact on the rupee's trajectory might be limited. Nomura suggests the positivity from the US-India trade deal is likely to offer only short-lived support, citing the Reserve Bank of India's (RBI) ongoing foreign exchange reserve accumulation as a key factor that will continue to weigh on the currency. The RBI's policy is to curb excessive volatility by intervening in the forex market, selling dollars when the rupee depreciates abruptly and buying them when it strengthens too quickly to prevent disorderly conditions. This strategy, coupled with a significant net sale of $49.5 billion in FX reserves during 2025, indicates a preference for stability over outright appreciation.
Historically, the Indian rupee has faced considerable pressure since January 2025, influenced by trade uncertainties and persistent foreign outflows. In August 2025, the RBI intervened with a $5 billion operation to counteract a sharp slide triggered by US tariffs. Although the recent trade agreement removes a key source of uncertainty, a substantial increase in foreign portfolio inflows is not universally anticipated. Global investors remain focused on macro themes such as artificial intelligence and data centers, with less emphasis on emerging market currencies. Furthermore, the rupee's real effective exchange rate (REER) valuation is at its lowest since 2014, suggesting undervaluation, but this has not prevented its underperformance relative to peers.
3. The Future Outlook
Looking ahead, forecasts for the Indian Rupee present a divided picture. Some analysts anticipate a rebound towards the 88.5-89 range in the coming weeks, potentially reversing large outflows. HSBC's base case targets USD/INR at 90 by the end of 2026, while MUFG projects USD/INR at 89.50 in Q1 2026, rising to 93.00 by Q4 2026, citing slower fiscal consolidation and higher borrowing requirements. ING foresees potential upside for the INR in 2026, with a year-end target of 87.00, whereas Bank of America suggests a rise to 86/USD by 2026. Trading Economics forecasts INR at 91.44 by the end of the current quarter and 90.22 in 12 months. The RBI's balancing act between managing inflation, supporting growth, and maintaining exchange rate stability, while also bolstering forex reserves, will be a critical determinant of the rupee's path. Any intervention below 90 is expected as the RBI aims to bolster reserves.