Fixing the Rupee: Here’s How We Can Respond to Global Currency Volatility


The Indian Rupee’s fall against the US Dollar is more of a routine than an event, but lately the decline has accelerated and this is cause for concern.

The rupee has fallen by around 7% against the dollar in 2022, eating away at India’s purchasing power, fueling inflation and affecting GDP growth prospects. RBI is burning foreign exchange reserves to prevent the rupee from slipping below 80 against the dollar as a breach of the chosen resistance point could allow rupee bears to push it lower and inflict more pain on the economy Indian. However, there is some relief for the Rupee as the explosive rise in the Dollar has left other key currencies behind and the Rupee has appreciated against the Euro, Yen and Pound.

A combination of runaway inflation and interest rate hike hysteria in the United States is shaking the world. The militarization of oil and finance in the geopolitical standoff between the West and Russia is exacerbating inflation and recession worries everywhere and sucking global capital into the dollar for its safety. Speculators expect things to get worse economically and politically and they are shorting most currencies and buying dollars.

India has its work cut out in managing the value of the rupee against the dollar as it remains hostage to oil prices and needs to control its current account deficit to rejuvenate its economy post-Covid. India’s current account deficit is widening and net capital inflows are no longer filling the gap. GDP growth is under pressure due to the symbiotic relationship between rising inflation and falling rupiah. Indian businesses are feeling the pinch as the majority of them spend far more in dollars than they earn.

Historically, the oil-rupee-dollar matrix has been the most powerful factor in India’s economic, ideological and diplomatic choices since independence. In 1948 a dollar cost four Indian rupees and now it costs 20 times more, mainly because India has to pay foreign oil with dollars to move things around. India even tried to suppress consumption, and by extension production, until the late 1980s to save dollars, and it all but allied with the Soviet Union to source oil without dollars. . Now, once again, India finds itself seeking relief from an oil war and the resulting soaring inflation and falling currency.

RBI is trying to protect the rupee from a crushing dollar by deploying everything it has in its arsenal. He sells dollars from reserves to deter rupee bears. It increased import duties on gold and allowed higher interest rates on new currency deposits by NRIs. It also relaxed the limit on foreign portfolio investors on government and corporate bonds and doubled the limit on foreign currency borrowing by companies. All this was not enough to turn the tide, but it slowed down the dam. RBI has even allowed invoicing and settlement of international trade in rupees.

The cause of the rupee is not helped by the restrictions and additional duties on the export of basic products which the world desperately needs. India is wary of political instability that could result from the diversion of food stocks, petroleum products and industrial materials to exports. Also, Indian banks are not keen on taking more expensive NRI currency deposits in a volatile and low growth environment.

The decision to allow rupee trading is interesting. India has settled the rupee trade in the past – the rupee-ruble trade with the Soviet Union is a prime example. India also paid for Iranian oil in rupees, until the United States banned it. In 2013-2014, India entered into swap agreements with many oil exporting countries. However, transactions in rupees might take time. For now, Russia wants everyone to pay for its oil and gas in rubles to protect its currency, although it is offering India a big discount. Myanmar seems interested in paying India in rupees. Acceptance of the rupee in cross-border trade in the subcontinent is mostly unofficial.

To make the Indian rupee a viable currency for international payments, India must earn the world’s confidence in its economic power and market freedom. China, despite its economic and commercial clout, cannot persuade many countries to pay in yuan due to its policies and governance. India may try to revive rupee-based trade in the Indian Ocean region, where the Indian rupee was a common currency during British rule. But for this to happen, India must offer attractive incentives for rupee trading and commit to consistent trade and financial regimes.

For now, the repair of the rupee requires India to more aggressively resist the decline of the rupee, to increase exports sharply using the decline of the rupee, to persuade countries suffering in the same way to trade in using swaps where possible and managing a workable exchange rate for payment in rupees.

Maintaining a reasonable value of the rupee should be a high priority for India as it is essential to its economic and political stability.

Views are personal. The author is president of AIMA and president of CavinKare.


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