The Dollar vs. Rupee: What’s Behind the Struggle and How It Impacts India’s Economy !

Finance Wisdom by H-Bunny

Weekly Newsletter - 19 January 2025

Your Weekly Dose of Financial Insight with a Smile!??

Hello H-Bunny family!

We’re happy to have you with us this week as we dive into an important topic that affects all of us—The Dollar vs. Rupee Battle: What’s Really Going On? From rising costs to shifting global dynamics, this battle has far-reaching consequences. Let’s break it down and understand how this impacts you, me, and our nation as a whole.

“Why should I care?”

This isn’t just another finance headline. The climbing dollar and the sliding rupee directly affect our lives—from pricier gadgets to soaring fuel costs, expensive international education, and even changes in India’s global economic position. Let’s decode why this is happening, what it means for India, and how it impacts you.

?? A Snapshot of Current Trends

• Current USD/INR Exchange Rate: 86.59 (as of January 17, 2025).
• 52-Week Range: 83.15 (low) to 87.10 (high).
• Rupee Depreciation: Over 4.2% in the past year.

These numbers highlight the rupee’s consistent struggle against the dollar, which has been a trend over decades.

??? A Look Back: Rupee vs. Dollar Over the Years

• 2010: USD/INR = 45.73
• 2015: USD/INR = 63.33
• 2020: USD/INR = 74.10
• 2025: USD/INR = 86.59

In just 15 years, the rupee has lost nearly 90% of its value relative to the dollar. The reasons? India’s trade deficits, reliance on imports, and global economic shifts.

?? Why is the Dollar So Strong?

The US dollar is considered the world’s reserve currency, dominating international trade and finance. But what fuels its strength?

1.Strong US Economic Fundamentals:

• GDP growth remains robust (Q4 2024 at 3.1%).
• Unemployment rates are low (3.5%), ensuring steady economic momentum.

2.Federal Reserve’s Aggressive Interest Rate Hikes:

• Interest rates have climbed to 5.25% to combat inflation.
• Higher returns attract foreign investments, boosting the dollar’s demand.

3.Global Dependence on the Dollar:

• Over 60% of international trade is invoiced in dollars.
• 59% of global forex reserves are held in USD, cementing its dominance.

4.Safe-Haven Status:

• During global uncertainties, the dollar’s stability attracts investors, further strengthening it.

???? Why is the Rupee Struggling?

The Indian rupee's depreciation against the dollar stems from a combination of structural, global, and market-driven factors.

1. India’s Persistent Trade Deficit :

• ndia imports over 85% of its crude oil needs. Rising global oil prices, currently hovering around $91 per barrel, have led to an increased outflow of dollars.
• For the fiscal year 2024-25, India’s trade deficit is expected to reach $240 billion, driven by high energy and technology import costs.

2. Capital Flight :

• Foreign institutional investors (FIIs) pulled $15 billion from Indian equity and debt markets in 2024, redirecting funds to the US for higher returns due to the Federal Reserve's aggressive rate hikes.

3. Dwindling Forex Reserves :

• India’s forex reserves have dropped from a peak of $650 billion in 2022 to $585 billion as of now. This limits the Reserve Bank of India’s ability to intervene effectively in currency markets.

4. Structural Challenges :

• Dependence on imports for essential goods, sluggish domestic manufacturing growth, and infrastructure bottlenecks exacerbate the rupee's vulnerability to global shocks.

5. India’s Trade Deficit :

• India imports over 85% of its crude oil needs.
• Rising global oil prices (currently at $91/barrel) have widened the trade deficit, projected at $240 billion for 2024-25.

6. Capital Outflows :

• Foreign investors withdrew $15 billion from Indian equities and bonds in 2024, favoring US markets.

7. Limited Forex Reserves :

• India’s reserves have dipped from $650 billion in 2022 to $585 billion, limiting the RBI’s ability to intervene effectively.

8. Structural Economic Challenges :

• Regulatory bottlenecks, import dependency, and slow infrastructure development exacerbate vulnerabilities.

?? The Global Trade Connection

Nearly 85% of global trade is dollar-denominated, even when the US isn’t a party. This creates two key effects:

1. High Dollar Demand: Import-heavy nations like India require more dollars to fund oil, tech, and machinery purchases.
2. Price Sensitivity: Any uptick in oil or commodity prices directly affects India’s economy, further increasing dollar demand.

?? Comparing the Rupee with Other Emerging Market Currencies

While the rupee faces challenges, it isn’t alone among emerging market currencies. Here's a broader comparison:

• Brazilian Real (BRL): Witnessed a 15% drop in 2024, primarily due to fluctuating commodity prices affecting the Brazilian economy, which is heavily dependent on exports like iron ore and soybeans.
• South African Rand (ZAR): Declined 18% last year, driven by political instability and risks related to power shortages and economic stagnation.
• Chinese Yuan (CNY): Managed relative stability, thanks to a blend of strict currency controls, resilient export performance, and a sizable trade surplus.
• Turkish Lira (TRY): Experienced a sharp 30% decline in 2024, as Turkey battles inflation exceeding 40% and persistent political and economic turmoil.
• Argentine Peso (ARS): Depreciated by over 50%, exacerbated by hyperinflation and dwindling forex reserves. Source: Central Bank of Argentina
• Mexican Peso (MXN): Fell by 12%, impacted by weakening demand for exports and rising US interest rates, though relatively stable compared to other Latin American currencies.
• Indonesian Rupiah (IDR): Declined by 8%, driven by higher oil import bills and reduced foreign direct investment. Source: Bank Indonesia
• Russian Ruble (RUB): Down by 20%, facing economic sanctions and reduced energy export revenues due to geopolitical tensions.

Although the rupee’s performance aligns with some global trends, its steep depreciation underscores deeper structural challenges. India’s reliance on imports, slower policy implementations, and lagging infrastructure development put additional pressure compared to other emerging economies. India’s reliance on imports, slower policy implementations, and lagging infrastructure development put additional pressure compared to other emerging economies.

?? How Does a Weak Rupee Impact You?

1. For Consumers:

• Costlier Imports: Electronics, luxury goods, and fuel become more expensive.
• Travel & Education: International vacations and overseas education cost significantly more.

2. For Businesses:

• Exporters Benefit: IT, textiles, and pharma thrive as Indian goods become cheaper globally.
• Import-Dependent Industries Struggle: Sectors like automobiles and chemicals face rising input costs.

3. For the Government:

• Higher Fiscal Deficit: Rising import bills increase fiscal pressures.
• Inflationary Risks: Costlier imports translate to higher prices for consumers.

?? Lessons from the Global Stage

Emerging economies across the globe face unique challenges in managing their currency dynamics, particularly against the US dollar. Here are some valuable insights derived from their experiences:

1.Export Diversification:

• Countries like Brazil have broadened their export portfolios beyond commodities to include manufactured goods and services. Diversification minimizes the adverse impacts of fluctuating commodity prices on their currency values.
• South Korea’s focus on technology and automotive exports has made its economy more resilient against dollar strength.

2. Currency Swap Agreements:

• China has implemented bilateral currency swap deals with over 35 countries, facilitating trade in local currencies and reducing dependency on the dollar.
• Indonesia’s agreements with countries like Japan and South Korea also help mitigate dollar liquidity pressures during crises.

3. Building Forex Reserves:

• Nations like Singapore and Switzerland maintain substantial forex reserves as a buffer against market volatility.
• Malaysia has also prioritized strengthening its reserves, which are equivalent to around 5-6 months of import cover.

4. Stabilizing Inflation and Fiscal Policies:

• Chile combats inflation through strict monetary policies, ensuring currency stability. Its policies on copper exports, a major revenue source, are tightly managed to optimize earnings.
• Vietnam focuses on maintaining a balanced fiscal deficit while promoting export-friendly reforms to sustain competitiveness.

5. Encouraging Domestic Manufacturing:

• Thailand and the Philippines have increasingly invested in local industries, reducing their import dependency and shielding their economies from external shocks.

6. Strengthening Trade Partnerships:

• Mexico’s integration with the US and Canada through the USMCA (United States-Mexico-Canada Agreement) boosts trade while providing a cushion against extreme currency fluctuations.
• South Africa’s trade ties with China for raw materials have helped offset losses incurred by rand depreciation.

By studying these measures, India can adopt tailored approaches to enhance rupee resilience and mitigate the impact of dollar strength in the future.

Emerging economies like Brazil and South Africa offer lessons:

1. Export Diversification: Relying on diverse markets shields economies from dollar fluctuations.
2. Currency Swap Agreements: Partnerships with countries like China reduce dependency on the dollar.

?? Unique Insights

• Dollar Milkshake Theory: Explains how US monetary policy drains global liquidity into the dollar, weakening emerging markets.
• Petrodollar Influence: Global oil trade in dollars exacerbates dollar demand when oil prices rise.
• India’s Remittance Resilience: Despite challenges, India remains the largest recipient of remittances globally, bolstering its forex inflows.
• Tech-Driven Growth: Strategic tech exports can potentially aid India’s currency stabilization in the long term.

?? Strategies to Hedge Currency Risks

For Individuals:

• Book international trips early to lock in favorable exchange rates.
• Explore scholarships for overseas education to offset rising costs.

For Businesses:

• Use forward contracts to stabilize costs.
• Focus on global market expansion to leverage export advantages.

?? Can the Rupee Recover?

RBI’s Role:

• Active forex market interventions, though costly, stabilize short-term fluctuations.

Government Measures:

• Expanding domestic manufacturing under “Make in India.”
• Promoting renewable energy to reduce crude oil dependency.
• Boosting exports with favorable trade policies.

Private Sector Initiatives:

• Businesses are hedging currency risks and increasing local sourcing.

?? What Lies Ahead?

1. Short Term: Continued pressure as oil prices and geopolitical tensions remain high.
2. Medium Term: Potential recovery through structural reforms and export growth.
3. Long Term: A stronger rupee if India reduces import reliance and strengthens its manufacturing base.

?? Closing Thoughts

The dollar’s rise and the rupee’s fall reflect broader global economic trends, but they’re also reminders of India’s economic vulnerabilities. By understanding these shifts, we can prepare better as individuals, businesses, and a nation.

Closing Price (USD/INR, January 17, 2025): 86.59

What are your thoughts on this? Let us know in the comments below!

Let’s learn and grow together!

As we explore these economic trends, let’s work toward a better understanding of the world around us. By staying informed, we can navigate these challenges more effectively and adapt to the changing landscape.

Disclaimer: The views and opinions expressed in this newsletter are for informational purposes only. The content is not intended as financial advice or a recommendation. Please consult with a professional before making any financial decisions.

Cheers, The H-Bunny Team ???