THE sharp cut in reciprocal tariffs by the US to 18% will “remove all uncertainty” in the minds of global investors, and “the China +1 strategy will be back in the game” brightening the prospects of FDI inflows, according to Chief Economic Advisor V Anantha Nageswaran.
The rupee is likely to bounce back strongly when domestic financial markets open on Tuesday. It had settled at 91.51 to a US dollar on Monday. Growth forecasts may also be revised up to reflect a sharply improved outlook for the economy in terms of foreign demand for locally-produced goods.
The 50% tariff, comprising a reciprocal tariff of 25% and a penal 25% for the purchase of Russian arms and crude, has been in force for nearly half a year — a period that has seen foreign investors exit Indian financial markets amid heightened geopolitical and policy uncertainty.
“This undoubtedly changes the picture on capital flows,” Nageswaran told The Indian Express. “This was the biggest stumbling block for capital flows. This makes a huge, huge difference,” he said.
Foreign Portfolio Investors (FPIs) have pulled out nearly $12 billion on a net basis from the stock markets since the beginning of August 2025. This should, however, change now that the US and India have cut a deal that sees the tariff rate fall to a level that compares favourably with key export rivals like Vietnam, Malaysia, Cambodia, Thailand, Bangladesh, Indonesia (all 19-20%) and China (37%).
The government’s top economist said the cut in the tariff rate removes a “huge uncertainty” from the minds of both direct and portfolio investors. “In terms of FDI (foreign direct investment), the China plus one strategy was the one that was going to drive FDI inflows. Now, China+1 is back in the game,” Nageswaran said.
“When countries are on good terms there is better flow of capital,” said Nilesh Shah, Managing Director, Kotak Mahindra Asset Management and a part-time member of the Economic Advisory Council to the Prime Minister. “The announcement of the deal will clear the imaginary constraints and it should lead to increased capital flow into the markets, which in turn will not only lift the markets but also strengthen the rupee,” Shah said.
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“While the devil is in the details, the deal removes a hanging sword over rupee, equity and rates markets. Let us hope that it is a win-win deal for both the countries as they have a lot to gain through cooperation,” Shah said.
The trade deal with the US comes close on the heels of India and the European Union announcing a deal of their own. This means the “two biggest blocks of capital have clearly opened for India and we may see a turnaround in FPI flows this year”.
Along with FPIs pulling out money from financial markets, direct investment inflows – long-term money that helps set up factories on the ground – has weakened rapidly in the last couple of years. According to latest RBI data, November 2025 saw net FDI outflows of $446 million from India – outflows for the third straight month. So far in the first eight months of 2025-26, net FDI inflows stand at $5.63 billion, up from $959 million in all of 2024-25. Gross FDI inflows during April-November this year stood at $64.73 billion compared to $80.62 billion in the entirety of the last fiscal.
Weak FDI inflows have been a huge concern over the last couple of years. The Economic Survey for 2025-26, tabled in Parliament just last week, had described India as “a victim of geopolitics” and said that the rupee’s valuation does not accurately reflect India’s “stellar economic fundamentals” and had been “punching below its weight”.
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The rupee has weakened by almost 7% against the US dollar since the start of 2025 even though the greenback itself has fallen by almost 10% against a basket of key global currencies. In early December 2025, the rupee broke past the 90-per-dollar before falling past 91 later the same month. Last week, it nearly touched 92-per-dollar as it hit an all-time low of 91.99 per dollar.
While the immediate short-run should see the rupee appreciate strongly, domestic economic growth should get a leg-up over the course of the coming fiscal year.
“Naturally, it lends an upside risk to our growth estimates because of the sentiment, confidence, knock-on effects, and so on,” Nageswaran said on Monday. The Economic Survey predicted GDP growth rate to be in the range of 6.8-7.2% in the next fiscal year. This would be lower than the Indian government’s first advance estimate of 7.4% for 2025-26.