Who moved the exchange rate?

What is the relationship between the value of a currency and national pride? And how does the rupee-US dollar exchange rate impact India’s economy? The questions gain currency as the rupee touched an all-time low of nearly 88 to the dollar earlier this month. Over 10 years ago, the rupee was just above 63 to the dollar.

The greenback has been strengthening and with the prospects of major disruptions in global trade, the rupee may come under further pressure. It is not just the Indian currency, many other currencies have also fallen, a point emphasised by government mandarins who point out that while many currencies have seen sharp declines, the rupee’s depreciation has been relatively modest.

On its part, India’s central bank is focussed on the medium to long-term value of the rupee, write Surabhi, Rahul Oberoi and Teena Jain Kaushal. RBI Governor Sanjay Malhotra has underlined that the central bank is not overtly worried by day-to-day volatility, adding that the uncertainties that have driven the recent depreciation should settle down.

Analysts believe that US President Donald Trump’s Make America Great Again promise would lead to higher inflation, which, in turn, will slow down the prospects of interest rate cuts there. The US Dollar Index has already appreciated around 5% since January, and Standard Chartered Bank sees the US dollar’s strength as the dominant theme of 2025.

That rupee depreciation is a touchy subject is borne out by comments by Commerce and Industry Minister Piyush Goyal that “depreciation is a bad thing”, and that in the long run, India must focus on a stronger currency. Does this then explain the RBI’s recent intervention to stem the rupee’s slide? As Raghu Mohan writes, the spotlight has been on the RBI’s foreign exchange sales of an estimated $70 billion in defence of the rupee. Even though the institution does not target a specific level for the rupee, the issue is vital as imported inflation on account of a weaker rupee would in turn impact and delay a reduction in the interest rate. Given the slowing economy, this is a major challenge that the RBI will have to navigate.

The waters will remain choppy.

This is because President Trump’s Fair and Reciprocal Plan for trade and tariffs may unleash major chaos across the globe. Under the five-point approach, the US says it will impose reciprocal tariffs on any trading partner in retaliation for high tariffs on US products, unfair, discriminatory, or extraterritorial taxes and non-tariff barriers. Crucially, “policies and practices that cause exchange rates to deviate from their market value to the detriment of Americans” will also invite US ire.

While it is early days, the worry for India would include further strengthening of the dollar. Governor Malhotra and other RBI mandarins would be tested even more in managing the volatility while defending any national pride associated with the currency’s value.

@szarabi