The Indian rupee’s sharp rally following the announcement of a trade agreement between India and the United States lost momentum on February 4, with the currency opening slightly weaker at 90.43 against the dollar. This came a day after the rupee had closed at 90.27 on February 3, marking its biggest intraday rise since December 2018.

The surge in the previous session was driven by sentiment following the announcement by US President Donald Trump on February 2 of a bilateral trade deal with India that included a reduction in reciprocal tariffs on Indian goods from 25 percent to 18 percent. The development triggered optimism around trade flows, export competitiveness, and potential capital inflows, leading to a sharp appreciation in the domestic currency.

However, the enthusiasm proved short-lived.

As the rupee approached the psychological Rs 90 level, importers were seen actively buying dollars to hedge their near-term exposures. This behaviour effectively capped further gains in the currency and led to a mild pullback in early trade on February 4. For many import-dependent businesses, the sub-90 level presents an attractive opportunity to lock in costs, especially amid global commodity price volatility and uncertain external demand conditions.

Currency dealers noted that such importer demand is a recurring feature whenever the rupee strengthens rapidly, particularly after a sentiment-led move rather than a structural shift in dollar supply.

The focus of market participants has now decisively shifted to the upcoming Monetary Policy Committee meeting of the Reserve Bank of India scheduled for February 6, the first policy decision of calendar year 2026.

The central bank is widely expected to keep benchmark interest rates unchanged. However, traders and treasury desks are closely watching for signals around liquidity infusion measures and money market operations. Over the past few months, tight systemic liquidity has pushed up short-term yields and created intermittent pressure on the rupee, especially during periods of heavy dollar demand from importers and oil marketing companies.

If the RBI signals more durable liquidity support through tools such as open market operations or variable rate repo operations, it could help anchor short-term rates and ease currency volatility.

Analysts at Finrex Treasury Advisors indicated that the dollar/rupee pair could trade in a broad range of 89 to 92 in the coming days. They also advised exporters to increase hedge ratios to 30–40 percent at current levels, suggesting that the window of a stronger rupee may not persist if global dollar strength re-emerges.

The currency’s recent movement highlights a deeper dynamic in India’s forex market. While positive news such as trade deals and capital flows can drive sharp appreciation, structural dollar demand from imports, energy payments, and corporate hedging tends to limit sustained gains. This creates a pattern of short rallies followed by consolidation rather than a trending appreciation.

The India-US trade deal announcement has improved medium-term sentiment for exporters, particularly in sectors where tariff reductions can immediately improve pricing competitiveness. However, the currency market appears to be waiting for tangible evidence of improved trade flows rather than reacting purely to announcements.

From a broader macro perspective, the rupee’s behaviour also reflects the interplay between global dollar trends and domestic liquidity conditions. Any strengthening of the US dollar index or rise in US bond yields could quickly reverse gains in emerging market currencies, including the rupee.