In the last few weeks, the Indian rupee has recovered rapidly. Just a couple of months back, the rupee had touched its lifetime lows of ₹87.50/$. From there, it has now recovered to ₹84.50/$ in just a little over a month. That is 3.4% bounce in the rupee value in a short span. Also, this recovery has happened at a time when the global macros continue to be in a state of turmoil. Broadly, there were 3 factors that triggered a sharp recovery in the Indian rupee in this period. The good thing is India looks less vulnerable. 

One of the key reasons for the strength in the rupee stems from the weakness in the dollar. That is reflected in the US Dollar Index (DXY) cracking from a high of 110 levels to the current level of 99.5 and the index has been below the 100 mark for nearly 3 weeks in a row. There are several reasons for the fall in the dollar index, but the most important was the anticipated weakness in US growth. The latest GDP numbers for Q1-2025 are a testimony to that, as the quarter witnessed -0.3% contraction in GDP. Weak growth is an automatic recipe for a weak dollar; and that helped the INR. 

It is not that FPIs are not selling Indian equities. It is just that even when they sell, the recovery has been more robust. Take the example of FPI flows in the month of April 2025. The first fortnight of April 2025 saw FPI outflows of $3.96 billion. However, this was offset by FPI inflows of $4.57 billion in the second fortnight, resulting in net FPI inflows of $510 million in April. A similar trend was seen in the month of March also, though the FPIs remained marginal net sellers in that month. The moral of the story is that one-way FPI selling seems to be over for now, and that has not only led to a stronger Indian rupee, but it has also been influenced by rupee strength. But, the real story is; reciprocal tariffs. 

However, what the markets are really betting on now is a trade deal with the US. As of now, the reciprocal tariffs are only on hold. However, Trump is using these tariffs as a bargaining chip to get other countries running surpluses with the US, to open business opportunities in their respective countries. India has already made a start lowering trade barriers and it is likely to give an open run in accessing the Indian markets too. The trade deal may not happen right away, but considering the hostile tone adopted by countries like Mexico and even Canada, the timing is right for India to stitch trade ties with the US!