India’s trade deficit widened in the third quarter, moving from -$68.5bn to -$87.4bn. This indicates a larger gap between imports and exports over the period.
The change represents a deterioration of $18.9bn compared with the previous figure. The data is presented as a negative balance to show the shortfall in trade.
That Q3 2025 data, which showed the trade deficit widening to $87.4 billion, confirmed a trend we had been watching. It signals that our import bill is growing much faster than our export income. This fundamental imbalance puts direct downward pressure on the Indian Rupee.
The situation has not improved since then. We saw the full fiscal year ending in March 2025 post a record deficit of over $275 billion, and the latest monthly data for February 2026 showed the gap remains wide at $20.2 billion. This persistence is largely due to global oil prices staying above $90 a barrel and a continued surge in electronics imports for our domestic market.
For currency traders, this makes long USD/INR positions attractive. The Rupee has struggled to hold the 85.00 level, and we anticipate a slide towards 86.50 in the coming quarter. We are buying USD/INR call options with April and May 2026 expiries to capitalize on this expected depreciation.
The Reserve Bank of India will have to act, and its forex reserves have already fallen to $595 billion from their highs in 2025 as it defends the currency. If this pressure continues, a rate hike becomes a real possibility to attract capital inflows. We see value in positioning for this by looking at interest rate swaps that would profit from higher short-term rates.
On the equity side, a weaker Rupee and the threat of higher interest rates create headwinds for the stock market. Companies that rely heavily on imports will see their margins squeezed. Therefore, we are hedging our stock portfolios by buying put options on the NIFTY 50 index.
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