Rupee Recovers from All-time Low Amid Dollar Index Correction

Context: The Indian rupee hit a historic low of 87.29 per dollar, triggering concerns over rising imported inflation and trade deficit. The decline follows a sharp 1.24% rise in the Dollar Index (DXY).

About Dollar Index

• Dollar Index (DXY) is a measure of the value of the U.S. dollar relative to a basket of foreign currencies.
• Base Year and Calculation: It was established in 1973, shortly after the Bretton Woods Agreement was dissolved with a base value of 100.

Basket of Currencies

DXY compares the U.S. dollar against six major currencies:

• Euro (EUR) – 57.6% (highest weight)
• Japanese Yen (JPY) – 13.6%
• British Pound (GBP) – 11.9%
• Canadian Dollar (CAD) – 9.1%
• Swedish Krona (SEK) – 4.2%
• Swiss Franc (CHF) – 3.6%

Factors Influencing DXY

• Monetary Policy: S. Federal Reserve interest rate changes.
• Economic Indicators: GDP growth, employment rates, inflation.
• Global Events: Wars, recessions or financial crises impact the index.

Reasons Behind Rupee Depreciation

Strengthening Dollar Index & Trade War Concerns

• The Dollar Index (DXY) surged after the U.S. President imposed 25% tariffs on imports from Canada, Mexico, and China, escalating fears of a global trade war.

Capital Outflows 💰:

• Since October 2024, Foreign Institutional Investors (FII) have sold $11 billion worth of Indian assets.
• This capital outflow reduces forex reserves and weakens INR.

Widening Trade Deficit 📈:

• India’s trade deficit reached $188 billion in FY25 (so far), up 18% from FY24.
• A higher trade deficit increases demand for dollars, putting downward pressure on INR.

Robust U.S. Economic Data & Rising Interest Rates:

• Strong U.S. job data and expectations of higher Federal Reserve interest rates have made the U.S. Treasury yields more attractive to investors.

Economic Impact of Rupee Depreciation

Negative Impact

• Higher Imported Inflation 📈
• Higher Loan Servicing Costs for Indian Companies 💰
• Capital Flight & Lower FDI Inflows 📉

Positive Impact

• Boost to Export-Oriented Sectors 💼 – A weaker INR makes Indian exports cheaper globally, benefiting sectors like IT, pharmaceuticals, and textiles.
• Higher Remittance Value 🌍: Indians working abroad benefit from a weaker rupee, as remittances fetch more INR, supporting domestic consumption.

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