A trade deal between the US and India is not expected before 1 August. Sources report that Trump recently mentioned they were “very close” to a deal, but the situation has changed. Negotiations have been ongoing since June for what is referred to as a mini trade deal.
India has yet to receive a tariff letter from the US, with hopes for a compromise by 1 August. Without a compromise, India could face 26% tariffs announced in April. It is uncertain if the US will stick to this deadline or maintain the current 10% tariffs as talks continue.
India’s Desired Tariff Changes
India wants the US to drop the 26% tariffs and lower duties on steel, aluminium, and autos. In exchange, India may offer concessions on agriculture, dairy products, and certain industrial and petrochemical goods.
The aim was for a wider trade agreement by September or October. However, not reaching a limited deal could delay this timeline.
Given the report that a limited trade deal is unlikely before the August deadline, we should anticipate heightened volatility in Indian markets. This uncertainty surrounding the potential 26% tariffs puts a significant damper on sentiment, especially as US-India bilateral trade hit a record $191 billion in the 2022-23 fiscal year. We believe traders should prepare for sharp market movements based on news flow from the negotiations.
Buying Volatility Strategy
This environment suggests a clear strategy of buying volatility. India’s VIX, a measure of expected market choppiness, may be relatively subdued now, but it has historically spiked on negative global cues, such as during the 2020 market crash. We see value in purchasing options, like straddles on the Nifty 50 index, to profit from a significant price swing in either direction as the deadline approaches.
The currency market will be a primary battleground, and we should watch the USD/INR pair closely. The Indian rupee is already trading near historic lows of around 83.5 to the dollar, and the failure to secure a deal would likely push it weaker. A tactical long position on the dollar against the rupee could serve as an effective hedge or a direct speculative play on the impasse.
For those with exposure to specific sectors, we recommend defensive positioning. The sticking points on steel, aluminum, and autos make companies in these industries particularly vulnerable to a tariff hike. We think it is prudent for traders to buy protective put options on stocks within these sectors to insulate their portfolios from a potential downturn if Washington proceeds with the higher duties.
Despite comments from the President about being “very close,” the current situation warrants caution. The possibility remains that the administration could ignore the deadline and maintain current tariff levels to allow talks to continue. This scenario could trigger a relief rally, which is why option strategies that benefit from volatility, rather than a purely directional bet, appear most attractive in the coming weeks.
