Straight Talk | Modi’s Strategic Patience Pays Off: How India Got A Surprise Deal With The US

Last Updated:February 03, 2026, 13:23 IST

India negotiated a deal that would have been unthinkable in the depth of the trade war. This was not surrender. This was leverage. India now has among the lowest tariffs in Asia.

In the 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 normalised ties with China after four years of military tension. He signed a transformational trade agreement with Europe that two decades of negotiations could not secure. He faced down Trump’s tariffs without flinching. He launched precision strikes deep into a nuclear-armed rogue state called Pakistan. And he swept elections in Bihar, Maharashtra, Haryana and Delhi, consolidating political dominance at home.

Now comes the final lesson from what has been an extraordinary year: India’s government allowed the rupee to slide to historic lows, and this apparent weakness is actually the soundest strategic choice Modi could have made.

The rupee fell to 92 per dollar—a historic low. Hours within the India-US deal being announced though, it recovered to about 90 against the dollar.

Traditionally, the decline seen in the rupee’s value over the past few months would signal crisis and weakness. Governments usually scramble to defend against such currency depreciation. Central banks drain reserves. The narrative becomes one of economic distress and lost confidence. But India’s approach has been different. The Reserve Bank of India has resisted the urge to spend heavily to defend the currency level. Instead, it has accumulated reserves to a record $709.4 billion. It has distinguished between speculative shocks requiring intervention and fundamental adjustments the market should be allowed to make. It has let the rupee fall freely.

This choice was not made in isolation. It is the culmination of a strategic judgment that began with the India-US trade negotiations.

When Trump’s administration imposed a 50 per cent tariff on Indian goods in August 2025, it was the first real test of Modi’s conviction that India would not bend under pressure. The tariff was punishing. Gems and jewellery exporters faced collapse. Textiles, leather, engineering sectors reeled. The government could have capitulated. It could have promised to buy more from America, to abandon Russia, to align completely. Instead, it held firm through months of uncertainty and negotiation.

On February 2, Trump called Modi. The conversation was personal. Within hours, the tariff fell from 50 per cent to 18 per cent. 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 now has among the lowest tariffs in Asia.

An 18 per cent tariff is still an 18 per cent tariff. Indian exporters would still face some cost burdens, but they are much better placed that they were just a week ago. Interestingly though, the Indian currency was simultaneously depreciating to offset that burden. The rupee has fallen approximately 4 per cent in 2025. When an Indian exporter earns in dollars and converts them to rupees, that 4 per cent decline immediately improves margins by 4 per cent. The effective tariff burden—18 per cent minus 4 per cent—becomes 14 per cent. What looked like 18 per cent in the trade agreement looks considerably smaller when the currency moves to support exporters.

This was not accidental. The government allowed the rupee to fall precisely because it understood that depreciation would serve the export sector. The Economic Survey released in January confirmed this strategy explicitly. It stated that an “undervalued rupee acts as a natural hedge" against tariff burdens and “enhances export margins." Critically, it noted that this currency weakness did not generate inflation. Food prices are in deflation. Overall inflation sits at 2 percent—far below the RBI’s target band. A weaker rupee in a deflationary environment strengthens rather than undermines the economy.

The RBI’s forex operations tell the real story. Some policymakers, facing a collapsing currency, would have engaged in panic selling of reserves to shore up the rupee. India did the opposite. Reserves climbed to $709.4 billion from $704.8 billion just months earlier. The reserve growth came not from heroic export performance—India still runs a merchandise trade deficit—but from gold valuations and deliberate RBI operations. The central bank used the forex kitty strategically, deploying forward contracts as insurance rather than burning reserves in futile defence of an arbitrary exchange rate level.

This reveals the intellectual sophistication underlying Modi’s approach. The government and the RBI recognised that India faces structural external imbalances. It imports more than it exports. It depends on capital inflows to balance its accounts. When capital stops flowing—as it did when the Trump tariff uncertainty peaked and foreign investors retreated—the rupee should weaken. Fighting this weakening requires burning reserves and raising interest rates. Both measures impose costs on the economy. The rupee weakness, instead, does the job naturally. It makes Indian goods cheaper in global markets. It creates the incentive for exporters to increase volumes. Over time, the trade deficit narrows.

India’s current account deficit—the broadest measure of external balance—stands at 1.3 per cent of GDP in the latest quarter, down from 2.2 per cent a year earlier. The merchandise trade deficit persists, but services exports are surging. Remittances from overseas Indians have reached record levels. The system is adjusting through the rupee, not through policy desperation.

Against this background, growth remains explosive. The RBI raised its forecast for FY26 to 7.3 per cent, retaining India’s position as the fastest-growing major economy globally. The third quarter of FY25 delivered 8.2 per cent—the highest in six quarters. Inflation sits at less than 2 per cent, lower than the RBI’s target band. The current account deficit is manageable and declining. Foreign exchange reserves are at record highs. In this environment, a weaker rupee is not a problem. It 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 that killed 26 civilians. The operation struck eleven Pakistani airbases, including the strategically significant Nur Khan base near Pakistan’s nuclear command structure. Every Pakistani retaliatory attempt was intercepted. The message was clear: India can operate against a nuclear rival with precision and resolve without triggering nuclear escalation. Pakistan sued for ceasefire within four days – overwhelmed by unforgiving Indian air power. The operation demonstrated that India has overcome the strategic self-restraint of previous decades.

Weeks later, PM Modi had met President Xi Jinping and President Vladimir Putin in Tianjin. The message was equally clear: India would not allow its China policy to be framed through a third country. Modi made explicit that India and China would pursue strategic autonomy. Within months, direct flights resumed, pilgrim visits were restored, visa procedures eased. After four years of military tension and border conflict, normalisation had begun.

The EU trade deal followed the same pattern. Negotiations that had dragged for two decades suddenly accelerated. The message was not subtly delivered: Europe needed an alternative to China. India needed fair market access. The agreement was struck on terms that protected Indian agriculture while opening sectors where India has genuine competitiveness. In many ways, fearing the sheer potential of the India – EU deal, the US suddenly scrambled to secure its own trade deal with India.

In each arena — China, Europe, the United States — Modi’s government demonstrated resolve. It negotiated from conviction rather than desperation. It accepted short-term pain when that pain served long-term strategy. And it understood that the economy’s fundamentals were strong enough to absorb external shocks.

The rupee’s slide sits within this pattern. The government has made clear it will not sacrifice growth and inflation control to defend an arbitrary exchange rate. The RBI’s accumulation of reserves shows confidence rather than panic. The strong fundamentals—growth, inflation, reserves—mean the rupee’s weakness reflects reality, not fear. Exporters gain from depreciation. Importers pay a cost. Over time, the imbalance adjusts.

Critics will say the rupee’s fall is a sign of external weakness. It is not. It is a sign of external realism. India runs a trade deficit. It cannot be closed through policy will alone. The rupee falls until the deficit narrows. That is how markets work. That is how adjustment happens. The government’s job is not to fight this process but to ensure it happens without triggering inflation, reserve depletion, or growth collapse. India has managed precisely that.

Trump spent months threatening India with escalating tariffs. He eventually cut from a staggering 50 per cent to just 18 per cent. That was a victory. But the victory would have been hollow if Indian exporters then faced an 18 percent tariff that wiped out margins. The rupee’s depreciation ensures they do not. The government has not publicly boasted about engineering this coordination. Nor should it. The sophistication lies in understanding that the rupee does not need to be fought. It needs to be managed. India is managing it superbly.

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