Markets tune out the noise, focus on trade and currency signals

The week ending February 6 offered a timely reminder—if one were needed—that markets do not move in isolation. They respond to a dense interplay of policy signals, global trade currents and currency cues.

In the span of a few days, investors had to digest the Union Budget, the India–EU trade agreement and the long-anticipated India–US trade deal—each carrying distinct implications for sentiment and strategy. Unsurprisingly, volatility followed.

The initial market reaction was cautious. The hike in the Securities Transaction Tax on futures and options trades weighed on sentiment, triggering a sharp but short-lived sell-off. Markets, however, proved nimble.

News of the India–US trade deal quickly shifted the mood, reinforcing a familiar truth: while near-term frictions unsettle traders, credible long-term growth signals continue to command attention.

From a structural standpoint, the India–US agreement is clearly positive for labour-intensive export sectors—textiles and apparel, gems and jewellery, leather and footwear, and marine processed foods. These industries are employment-rich and geographically dispersed, making the deal especially significant from a jobs perspective. While India’s $41 billion trade surplus with the US is likely to narrow as imports of energy, defence equipment, aviation goods and high-technology products rise, this rebalancing should be viewed not as a loss but as a maturation of bilateral trade.

Crucially, the exclusion of cereals, dairy and poultry safeguards domestic agriculture, ensuring farmers’ interests are not compromised in the pursuit of export growth.

Adding ballast to market sentiment has been a perceptible shift in foreign institutional investor (FII) behaviour. Up to February 6, FIIs emerged as net equity buyers to the tune of Rs2,645 crore, with buying recorded in three of the last four trading sessions.

This reversal owes much to currency dynamics. The rupee’s recovery from a record low of 91.72 to around 90.30 against the dollar boosted confidence, even though it softened again to about 90.70 by the week’s close.

Expectations that the rupee could stabilise and gradually appreciate to below 90 by end-March 2026 raise the prospect of sustained FII inflows, though much will depend on how global capital reallocates amid the unfolding AI-driven trade cycle.

The currency, however, remains sensitive to policy cues. Following the Reserve Bank of India’s decision to hold rates and maintain a neutral stance, the rupee weakened by 35–40 paise, reflecting the absence of an immediate supportive trigger.

Yet focusing solely on rates risks missing the broader policy intent. By keeping rates steady while advancing structural reforms, the RBI has signalled its priority: financial stability alongside more effective credit transmission.

Measures such as raising the collateral-free loan limit for MSMEs to Rs20 lakh are timely, particularly when exports remain fragile and domestic consumption uneven.

Easing unsecured lending norms for urban cooperative banks, the rollout of Mission SAKSHAM, and the proposed framework for corporate bond derivatives and total return swaps together point to a more resilient and better-governed financial ecosystem—one that strengthens last-mile finance while deepening capital markets.

With the dollar index hovering near 97.70, the rupee is likely to trade sideways in the near term, within a broad range of 90.00 to 91.25.

Markets, for their part, appear willing to look beyond short-term noise, anchoring optimism in trade-led growth, currency stability and a central bank quietly focused on the long game.