India’s financial markets opened sharply higher Tuesday as the Indian rupee rallied above ₹90 to the US dollar, building on investor optimism after a late-night trade announcement between Prime Minister Narendra Modi and US President Donald Trump. The local unit, which ended Monday at ₹91.5363, strengthened over 1% in early trade, underscoring renewed risk appetite among global and domestic investors.

The breakthrough came after Mr Modi and President Trump agreed to a bilateral trade arrangement, under which the United States will reduce reciprocal tariffs on Indian goods to 18 per cent. The deal effectively rolls back punitive duties that had escalated to levels as high as 50 per cent and removes an additional penal tariff linked to India’s energy imports.

Prior to this announcement, uncertainties around US tariff policy had hung over Indian markets for months. In 2025, the Trump administration imposed steep tariffs on Indian exports, citing trade imbalances and India’s import of discounted Russian crude. The fresh accord dismantles a significant portion of that tariff overhang, narrowing barriers to key Indian export sectors.

Officials from both governments have begun framing the pact as a turning point in economic relations. Prime Minister Modi expressed gratitude on social platforms, highlighting the reduced barriers for “Made in India” products, while Union ministers described the deal as confidence-boosting for trade and investment. In Washington, US officials pitched the arrangement as strengthening two of the world’s largest democracies and opening new avenues for commerce and cooperation.

For markets, the immediate reaction was unambiguous. Alongside currency gains, country benchmarks and indices linked to export-oriented sectors traded with marked strength, reflecting expectations of revived foreign portfolio investor interest and reduced policy uncertainty. Early data suggests that foreign flows, which had been net negative through much of last year, may reverse course as sentiment improves.

This trade development holds strategic importance for India’s external sector. Slashed tariffs on US imports enhance the price competitiveness of Indian exports in America’s $25 trillion economy, with exporters in textiles, gems and jewellery, and engineered goods set to benefit from lowered entry costs. The agreement also removes a major source of policy risk that had dampened foreign investor confidence and weighed on the rupee throughout 2025.

The strengthening of the rupee and improved equity sentiment may help ease inflationary pressure tied to imported goods. However, the deal also comes with commitments on energy sourcing and reduced trade barriers for US products, which will require careful calibration of domestic industrial and trade policies.

In the near term, the rupee’s appreciation improves import purchasing power and moderates inflationary impulses from global commodity prices. Equity markets are positioned for a risk-on environment, particularly for sectors with high US export exposure. Foreign investors, who had pared down India allocations amid tariff friction and geopolitical risk, may reconsider their stance as tariff barriers recede.

However, volatility could persist if market expectations around FPI flows outpace actual capital movements. Longer-dated fixed income yields may also adjust as currency stability reduces hedging costs for foreign investors.