Indian Rupee Strengthens on Tax-Cut Hopes

On August 18, 2025, the Indian rupee (INR) rose sharply to ₹87.3925 per U.S. dollar, compared to ₹87.55 recorded last Thursday. This upward momentum was largely driven by renewed investor optimism over India’s proposed tax reforms, announced by Prime Minister Narendra Modi. Market participants interpreted the sweeping proposals as a catalyst for corporate earnings growth, foreign investment inflows, and a revival of risk appetite in Indian equities.

The rupee’s rally underscores the strong correlation between fiscal policy optimism and currency performance in emerging markets. Investors expect that tax reductions—especially for small businesses, manufacturing units, and middle-income households—could boost domestic consumption and support sustainable economic expansion.

Equities and Risk Appetite Fuel Currency Gains

The announcement of tax reforms also revitalized the Indian equity markets, creating a positive feedback loop for the rupee. Indian equities surged as domestic and foreign investors increased exposure to both large-cap and mid-cap stocks, betting on stronger corporate earnings following reduced taxation pressures.

“Investor sentiment is key for INR movement,” said a senior forex analyst. “Tax reforms signal structural improvements in India’s economy, prompting inflows that support the currency.”

This effect was reinforced by easing geopolitical tensions, notably President Donald Trump signaling no additional sanctions on Russia. This development alleviated concerns about import cost pressures for India, which heavily relies on imported oil and raw materials.

Technical Analysis: Key Support Levels

From a technical standpoint, the rupee’s 21-day moving average at ₹87.20 has emerged as a crucial support level. Analysts expect the INR to maintain its upward trajectory as long as it holds above this technical benchmark. Any breach below ₹87.20, however, could indicate short-term corrective pressures, especially in light of upcoming U.S. tariffs on Indian goods, scheduled to start this Wednesday.

Traders are also monitoring USD/INR volatility closely, using the current momentum to anticipate entry points for currency hedging or speculative positions.

Lingering Uncertainty: U.S. Tariffs and Trade Risks

Despite the rally, uncertainty looms. The U.S. tariffs on Indian exports—set to begin this week—pose potential headwinds for India’s foreign trade balance. The tariffs were unexpectedly highlighted following the cancellation of a planned trade visit to New Delhi by U.S. officials, which sparked concerns over bilateral trade friction.

Market observers note that while tax optimism is fueling short-term gains, medium-term INR stability will depend on India’s ability to navigate trade relations with the U.S., manage fiscal policy, and sustain foreign investment inflows.

Outlook: Positive but Cautious

Analysts remain cautiously optimistic about the rupee’s performance in the coming weeks. Key drivers include:

• Implementation of tax reforms and their effect on domestic corporate profitability.

• Global risk sentiment, especially oil price stability and geopolitical developments.

• U.S. trade policy, particularly the impact of tariffs on Indian exports.

With eyes on both fiscal reforms and international developments, the INR is positioned for potential continued strength, but traders are advised to remain vigilant for policy-induced volatility.

Conclusion:
The Indian rupee’s rally on August 18 reflects the power of tax-cut optimism and easing geopolitical fears in shaping currency markets. While technical support and investor sentiment underpin the recent gains, looming U.S. tariffs and broader trade uncertainties remind traders that the INR’s trajectory remains highly sensitive to global and domestic policy shifts.