The India-US trade deal announced late Monday has brought down the tariff on Indian goods entering the world’s largest economy to 18% from 50%. While this is undoubtedly positive for the Indian economy, the consequences are not exactly straightforward.
First things first: the reduction in the tariff to 18%, which comes into force immediately, means the effective US import duty on Indian products could fall to anywhere between 12% and 16% from 35-36%, according to economists.
The effective tariff rate is lower than the headline number of 18% because of the concessions the US has made on electronics, pharmaceuticals, and food items such as spice, coffee, and tea and the Section 232 tariffs on products such as steel, aluminum, and automobiles. This, economists say, should provide significant relief to India’s export sector, especially labour-intensive ones such as gems and jewellery, textiles, agricultural products, and engineering goods.
The above should have several positive consequences. Higher exports to the US should narrow India’s merchandise trade deficit, which had surged to an all-time high of $41.7 billion in October 2025 before cooling down to $25 billion in the final month of 2025. Higher exports, especially from key sectors such as textiles, could mean their job situation should, over a period of time, return to pre-August 2025 levels.
The impact on the economy should be meaningful, considering the US is India’s largest destination for merchandise exports, accounting for nearly a fifth of all shipments in value terms. As a result, all economists — including Chief Economic Advisor V Anantha Nageswaran — expect growth forecasts to be revised higher in the coming months. The Economic Survey predicted the GDP growth rate to be in the range of 6.8-7.2% in FY27, down from 7.4% this year.
However, an improved growth outlook following the US tariff cut means the case for the Reserve Bank of India (RBI) to further add to its 125 basis points worth of interest rate cuts announced in 2025 has weakened.
“The deal now would boost the growth certainty and the current momentum seen in high frequency indicators can continue to sustain. We therefore change our rate cut call of 25 bps to hold for the upcoming February 6 meeting,” BofA Securities economists Rahul Bajoria and Smriti Mehra said in a note on Tuesday, adding that RBI is “now done cutting rates”. The policy repo rate currently stands at 5.25%.
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Capital flows and the rupee
While the impact on India’s growth from the trade deal will take some time to materialise, the boost to market sentiment has already led to tangible results: the stock markets closed over 2% higher on Tuesday — reversing the post-Budget losses due to the hike in the Securities Transaction Tax (STT) — while the rupee strengthened by more than 1% against the US dollar.
The cloud of uncertainty cast by the delay in India and the US finalising an agreement has weighed heavily on the rupee’s exchange rate, which crossed the 90- and 91-per-dollar levels in December 2025 and nearly 92 per dollar last week. Now, the only way seems up, at least in the short run, with the rupee closing strongly on Tuesday at 90.27 per dollar. HSBC analysts said on Tuesday that the rupee is now “slightly undervalued” and expect the currency to appreciate further to 88-per-dollar by the end of March.
But beyond the short run, the outlook for the rupee is a bit unclear. For one, there is still some clarity required over the contours of the US deal. Second, the factors that led to the rupee weakening by around 7% in 2025 haven’t really vanished. As such, Tuesday’s gains are not expected to be “sustained”, Singapore-based Mitul Kotecha, head of FX & EM Macro Strategy Asia at Barclays, said.
Foreign Portfolio Investors (FPIs) had pulled out nearly $12 billion from India’s stock markets on a net basis during August 2025-January 2026. According to Kotecha, “hot money flows” such as those of FPIs have become important drivers of the rupee’s exchange rate. “As such, factors such as an unexciting earnings season, relatively high valuations, and re-allocation to more AI-skewed equity markets, have acted as a stumbling block for Indian equities.”
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Then there is the deal itself. While the details remain elusive, the fact that President Donald Trump has said India will move towards reducing its tariffs and non-tariff barriers against the US “to ZERO” and has committed to over $500 billion of American products across sectors means the situation is not all rosy. “While this is likely to be staggered, it is also likely to add to flow pressure on rupee,” analysts at Japanese brokerage firm Nomura said.
For context, India’s imports from the US in 2024-25 amounted to $46 billion. Its total global imports in that year were $721 billion.
One deal after another
India’s deal with the US comes close on the heels of the one struck with the European Union just last week. This trend, economists point out, bodes well for India’s share in global exports in the medium term.
“In 2025, the government concluded/signed trade agreements with Oman, the UK and New Zealand. We believe the US India trade deal and recent FTAs will promote economic growth by reducing tariffs, lower input costs for Indian producers, increase market access, boost export competitiveness, promote a wider export market and encourage FDI. This may further push manufacturing, create jobs and increase India’s exports in the medium term,” UBS Chief India Economist Tanvee Gupta Jain said.
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