Last updated:
India negotiated a deal that would have been unimaginable in the depths of the trade war. This was not surrender. This was leverage. India is now one of the lowest tariff countries in Asia.
Prime Minister Narendra Modi and US President Donald Trump. (AP Photo)
In a span of twelve months, Narendra Modi has rewritten the rules of Indian foreign policy. He balanced relations with Russia and Ukraine without choosing sides. He normalized relations with China after four years of military tension. He signed a transformative trade deal with Europe that two decades of negotiations could not secure. He faced Trump’s tariffs without hesitation. They launched precision strikes deep into the nuclear-armed rogue state called Pakistan. And he won elections in Bihar, Maharashtra, Haryana and Delhi and consolidated political dominance at home.
Now comes the final lesson from what has been an extraordinary year: India’s government allowed the rupee to fall to historic lows, and this apparent weakness is actually the best strategic choice Modi could have made.
The rupee fell to 92 per dollar – a historic low. However, within hours of the India-US agreement being announced, it touched almost 90 against the dollar.
Traditionally, the decline seen in the value of the rupee over the past few months would indicate distress and weakness. Governments typically struggle to protect against this type of currency devaluation. Central banks deplete reserves. The story becomes one of economic crisis and lost self-confidence. But India’s approach has been different. The Reserve Bank of India has resisted the urge to spend heavily to protect currency levels. Instead, it has accumulated a record $709.4 billion in reserves. It distinguishes between speculative shocks requiring intervention and fundamental adjustments to the market. This has allowed the rupee to fall freely.
This choice was not made alone. This is the culmination of a strategic decision that began with the India-US trade talks.
When the Trump administration imposed 50 percent tariffs on Indian goods in August 2025, it was the first real test of Modi’s conviction that India would not buckle under pressure. The tariff was punitive. Gems and jewelery exporters faced collapse. Textile, leather, engineering sectors were affected. The government could have bowed down. It could promise to buy more from the US, abandon Russia, abandon the alliance altogether. Instead, it held firm through months of uncertainty and negotiations.
On February 2, Trump called Modi. The conversation was personal. Within a few hours the tariff fell from 50 percent to 18 percent. India had negotiated a deal that would have been unthinkable in the depth of the trade war. This was not surrender. This was leverage. Trump blinked first, and India is now one of the countries with the lowest tariffs in Asia.
An 18 percent tariff is still an 18 percent tariff. Indian exporters will still face some cost burden, but they are in a much better position than they were a week ago. However, interestingly, the Indian currency was simultaneously depreciating to reduce that burden. The rupee has fallen by about 4 percent in 2025. When an Indian exporter earns in dollars and converts it into rupees, a 4 per cent fall immediately improves margins by 4 per cent. Effective tariff burden – 18 per cent reduces to 4 per cent – 14 per cent. When the currency moves to support exporters, the 18 percent that appeared in the trade agreement looks much smaller.
This was not accidental. The government allowed the rupee to fall only because it believed that the depreciation would benefit the export sector. The Economic Survey released in January clearly confirmed this strategy. It added that “the undervalued rupee acts as a natural hedge against the tariff burden” and “increases export margins.” Critically, it was noted that this currency weakness did not generate inflation. Food prices are in deflation. Overall inflation stands at 2 per cent – well below the RBI’s target band. In a deflationary environment, a weak rupee strengthens the economy rather than weakening it.
RBI’s foreign exchange operations tell the real story. Faced with a falling currency, some policymakers may have made panic sales of reserves to support the rupee. India did the opposite. Reserves increased to $709.4 billion from $704.8 billion a few months ago. Reserve growth came not from heroic export performance – India is still reeling from a merchandise trade deficit – but from gold undervaluation and deliberate RBI operations. The central bank used foreign exchange reserves strategically, deploying forward contracts as insurance rather than burning reserves in a futile defense of an arbitrary exchange rate level.
This reveals the intellectual sophistication inherent in Modi’s approach. The government and the RBI acknowledged that India was facing structural external imbalances. It imports more than it exports. It depends on capital inflows to balance its accounts. When capital inflows stop – as happened when Trump tariff uncertainty was at its peak and foreign investors withdrew – the rupee should weaken. To combat this weakness there is a need to burn reserves and raise interest rates. Both measures impose costs on the economy. Instead, rupee weakness works naturally. This makes Indian goods cheaper in global markets. This gives incentives to exporters to increase quantities. Over time, the trade deficit reduces.
India’s current account deficit – the broadest measure of external balance – stood at 1.3 percent of gross domestic product in the latest quarter, down from 2.2 percent a year earlier. The merchandise trade deficit remains, but service exports are growing. Remittances sent by NRIs have reached record levels. The system is adjusting through money, not through policy frustration.
Against this backdrop, growth remains explosive. Maintaining India’s position as the fastest growing major economy globally, the RBI raised its forecast for FY2026 to 7.3 per cent. Q3FY20 contributed 8.2 per cent – the highest in six quarters. Inflation is less than 2 percent, which is below the RBI’s target range. The current account deficit is manageable and declining. Foreign exchange reserves are at a record high. In this environment a weak rupee is not a problem. This is a solution.
Modi’s year extended beyond economics. In May last year, he launched Operation Sindoor against Pakistan in response to the Pahalgam terror attack in which 26 civilians were killed. Eleven Pakistani air bases were attacked in this operation, including the strategically important Noor Khan Base near Pakistan’s nuclear command structure. Every Pakistani counter-attempt was stopped. The message was clear: India can act against a nuclear adversary with precision and determination without escalating nuclear tensions. Pakistan sued for a ceasefire within four days – alarmed by the inefficiencies of Indian air power. The operation demonstrated that India had overcome the strategic self-restraint of the past decades.
A few weeks later, PM Modi met President Xi Jinping and President Vladimir Putin in Tianjin. The message was equally clear: India will not allow its China policy to be shaped by a third country. Modi made it clear that India and China will achieve strategic autonomy. Within a few months, direct flights resumed, pilgrim visits resumed, visa procedures eased. After four years of military tension and border clashes, normalization had begun.
The EU trade agreement followed the same pattern. The conversation that had been going on for two decades suddenly intensified. The message was not delivered subtly: Europe needed an alternative to China. India needs fair market access. This agreement was made on terms that protected Indian agriculture while opening up areas where India has real competitiveness. In many ways, fearful of the broader prospects of an India-EU agreement, the US suddenly rushed to secure its own trade deal with India.
In every region – China, Europe, the United States – the Modi government demonstrated determination. It spoke with conviction rather than frustration. It accepted short-term pain when that pain served long-term strategy. And it realized that the fundamentals of the economy were strong enough to absorb external shocks.
The fall of Rupee follows this pattern. The government has made clear that it will not sacrifice growth and inflation control to defend an arbitrary exchange rate. RBI’s accumulation of reserves reflects confidence rather than panic. Strong fundamentals – growth, inflation, reserves – mean rupee weakness reflects reality, not fear. Exporters benefit from depreciation. Importers pay the cost. Over time, the imbalance is adjusted.
Critics will say that the fall of the rupee is a sign of external weakness. It is not. It is a symbol of external realism. India is in trade deficit. It cannot be stopped merely by policy will. The rupee falls until the deficit is reduced. This is how markets work. This is how adjustment takes place. The job of the government is not to fight this process but to ensure that it happens without inflation, depletion of reserves or decline in growth. India has managed this well.
Trump threatened India with tariff hikes for months. Ultimately it dropped from a staggering 50 percent to just 18 percent. That was a victory. But this victory would have been hollow if Indian exporters had to face 18 percent tariffs that would erode margins. Rupee devaluation ensures that they do not do so. The government has not made public claims about the engineering of this coordination. Nor should it be. The sophistication lies in understanding that there is no need to fight with the rupee. This needs to be managed. India is managing it brilliantly.
February 03, 2026, 13:23 IST
read more
