The Indian rupee is set to respond to the U.S. announcement of reciprocal trade tariffs this week, with investors keen to understand how the tariffs may impact global trade and economic growth. Meanwhile, government bond yields are expected to decline.
The rupee closed at 85.47 against the U.S. dollar on Friday, gaining 2.3% in March, driven by a boost in dollar inflows due to seasonal corporate activity and foreign portfolio investment. Despite its strong performance last month, which marked the highest monthly gain in over six years, the rupee faces potential challenges ahead.
On April 2, the White House is expected to announce reciprocal trade levies, as President Donald Trump has pledged to match tariffs imposed by other countries on U.S. exports. This development could put pressure on the rupee, which has benefited recently from a weaker dollar and the Reserve Bank of India’s (RBI) policy allowing for a more flexible exchange rate. However, Kotak Institutional Equities warned that uncertainties surrounding U.S. trade and tariff policies remain a significant risk to India’s external sector balance.
Kotak’s note projected the USD/INR exchange rate to range between 85 and 89 for FY2026, though this forecast will be reassessed after the tariffs are announced. Traders are also watching closely for the RBI’s response to any movements in the foreign exchange market. According to a trader at a Mumbai-based bank, the RBI may allow a notable increase in the USD/INR if there is a negative surprise.
In addition to the tariffs, U.S. economic data and remarks from Federal Reserve officials will be closely monitored throughout the week.
On the bond market front, traders expect the benchmark 10-year bond yield to remain in the 6.52%-6.60% range this week. The yield closed at 6.5823% on Friday, down 4 basis points for the week, and has fallen 15 basis points in March—the biggest drop in 10 months. Year-to-date, the yield has dropped 47 basis points, marking the largest decline in five years.
Bond yields dropped in the previous financial year as large foreign inflows and a dovish stance from global central banks boosted demand for local debt. Market participants expect this bullish trend to continue in the first week of the new financial year, fueled by expectations that the RBI will announce a second consecutive interest rate cut next week. The RBI’s monetary policy decision is due on April 9, and economists expect only one more rate cut in August, making it the shortest easing cycle on record.
Sentiment remains positive following a decline in domestic retail inflation to 3.61% in February, the lowest since July 2024, down from 4.26% in January. Market participants are also anticipating a favorable inflation report for March.
“The February MPC meeting marked the start of the rate-cutting cycle, and we expect it to continue in April, with the RBI providing forward guidance to assure markets that monetary policy will focus on boosting growth while keeping inflation within its target range of 2%-6%,” said Rahul Bajoria, head of India and ASEAN Economic Research at BofA Global Research.
Additionally, the government’s debt auction cycle will resume this week, with New Delhi’s debt supply expected to be lower than initially anticipated for the April-September period, which could steepen the yield curve further.
Key Events to Watch:
India:
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March HSBC Manufacturing PMI – April 2, Wednesday (10:30 a.m)
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March HSBC Services and Composite PMI – April 4, Friday (10:30 a.m)
U.S.:
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February Factory Orders – April 2, Wednesday (7:30 p.m. IST)
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February International Trade – April 3, Thursday (6:00 p.m. IST)
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Weekly Jobless Claims (week ending March 24) – April 3, Thursday (6:00 p.m. IST)
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March S&P Global Services PMI Final – April 3, Thursday (7:15 p.m. IST)
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March S&P Global Composite PMI Final – April 3, Thursday (7:15 p.m. IST)
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March ISM Non-Manufacturing PMI – April 3, Thursday (7:30 p.m. IST)
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March Non-Farm Payrolls and Unemployment Rate – April 4, Friday (6:00 p.m. IST)
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