In today's Finshots, we talk about the impact of the falling rupee, a rising dollar, and its far-reaching implications.
But here’s a quick sidenote before we begin. We’re on the lookout for a Marketing Intern to join us at Ditto Insurance! If you have a knack for content strategy, love building outreach and want to learn from an enthusiastic team while you grow, apply on our careers page here or share this with a friend who’d be a great fit.
The Story
First, a story to understand how the rupee falls, the dollar rises, and how currency rates are determined.
Mr. Nomad is an avid traveler with a knack for currencies since he’s used many during his travels. He’s in the US today, and to enjoy his trip without hassle, he wants to convert his rupees to US dollars. He finds a currency exchange shop that shows $1 = ₹83. And this is what you call an exchange rate. It changes frequently based on supply and demand for a particular currency. Now, Mr. Nomad decides to sleep on the decision before exchanging his money, but the next day, the rate changes to $1 = ₹84. It's no surprise to him since he’s seen this happen in every country. The rupee fluctuates in comparison to other currencies, and this comparison is called a currency pair. When you compare the rupee to the dollar, you call it the USD/INR currency pair, and this used to derive an exchange rate for the two currencies. The reason Mr. Nomad has to pay ₹84 today instead of ₹83 is because the demand for dollars has gone up, driving up its value.
This is why we hear that the rupee has “fallen” or depreciated against the dollar. If you were to travel to the US today like Mr. Nomad, you’d need to shell out ₹84.4 for a dollar, compared to ₹83.2 at the start of this year. It’s the highest amount in rupees for a dollar we’ve seen. And that’s why the headlines today are all about the rupee falling to an all-time low.
To sum it up, a rising exchange rate (USD/INR) means the rupee is weakening, while a falling rate means it’s appreciating. And with that out of the way, let’s see who benefits and who loses when the rupee weakens and the dollar rises.
Today, the dollar is on the rise, influenced by the Trump presidency. And this is bad news for India for a few reasons.
One, because India imports most of its oil – 87% of it in FY24 – and since oil is priced in dollars, a stronger dollar makes these imports costlier now than before.1 In FY24 itself, India spent almost $134 billion on oil imports, and a rising dollar will only inflate this bill, worsening the trade deficit (which is simply the excess of India’s expenses over its income earned). Plus, crude oil is a part of many goods and services in our daily lives — from petrol to aviation fuel, and plastic and fertilizers. So when oil prices rise, it triggers a domino effect, raising costs across various goods. And this brings us to the second negative, which is what we call imported inflation.
See, India is a net importer. Meaning our imports exceed our exports, and a stronger dollar makes most imports, not just oil, more expensive.2 So, even if the volume of imports remains the same, a rising dollar means a higher bill for the same goods, and it increases the inflationary pressures across the economy.
Then there are companies that have borrowed funds in dollars, which take a hit. See, if a company took a loan when the exchange rate was 83 and today it’s 84.4, they now need more rupees to repay the same dollar debt. India’s external debt has increased by $13 billion in just three months, reaching $682 billion by June 2024.3 A rising dollar only makes this debt heavier, adding to the repayment burden and making it increasingly harder for companies to manage their finances.
And perhaps the most concerning aspect today is that a rising dollar could spark a currency war of sorts. Because if the US imposes trade tariffs on China as promised (Trump says these could be as high as 60%), the Chinese renminbi could weaken, impacting other Asian markets, including India. A similar scenario played out in 2018 when US tariffs on China at 25% led to a sharp 10% fall in the renminbi versus the dollar, shaking Asian markets.4
In fact, a recent IMF research found that a 10% rise in the value of the dollar reduces output in emerging economies by 1.9% after one year, with negative effects lingering for years.5
So, is a rising dollar always bad for India?
Not quite. There are also those who benefit from this setup.
The Indian IT sector, for instance, is one of the biggest winners. Most of its revenue comes from overseas clients, especially in the US, and a stronger dollar means that when they convert their earnings back into rupees, they book higher revenue. The markets also seem to be aware of this, which is why IT stocks often see a boost when the rupee weakens compared to the dollar. The pharmaceutical sector benefits in a similar way, as many Indian pharma companies export a large share of their products to the US and Europe, earning in dollars.
The textile sector gains too, thanks in part to the “China+1” strategy, where global companies are looking for suppliers beyond China. A weaker rupee makes Indian textile products more competitive globally, attracting more buyers.
And remember while some sectors benefit from a rising dollar, not all businesses will see the same impact. The rupee-dollar exchange rate affects finances, but the fundamentals of each sector and business also matter. For instance, businesses that rely heavily on crude oil related imports for their raw materials, like energy, chemicals, and transportation, face higher costs due to expensive imported components.
So yeah, it’s an intricate web but that’s how a rising dollar or a falling rupee affects the economy and you.
Oh, one last thing. The reasons why the dollar has been going up are clear, but let's go over them again anyway—Trump became president and promised to spend more money and relax financial rules. When the government spends more and makes it easier to do business, it can boost the economy, making the dollar stronger. The Federal Reserve might raise interest rates to control rising prices and big debts, which means people get more return when they hold dollars. Plus, Trump wants to cut taxes and remove regulations in many areas, attracting more investment to the U.S. All this makes more people want dollars, putting pressure on other currencies like the rupee.
Of course, the RBI is keeping a close watch and will step in if things get out of hand.
But all this says that exchange rates aren’t just numbers. They shape our economy and have wider implications. The next time you see headlines about a weakening rupee, you'll know what to look for in the markets and who stands to win or lose.
Hope you all have a great weekend!
Until next time…
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Story Sources: The Hindu [1], PIB [2], Economic Times [3], Financial Times [4], IMF [5]
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