How a weak rupee and a strong dollar can affect your finances

The tug-of-war between a rising dollar and a falling rupee creates winners and losers.

The rupee is falling, the dollar is rising, and the headlines are buzzing. For many, this seems like just another financial news cycle, but these currency movements have far-reaching implications for businesses, the economy, and even your wallet.

Let’s break it down in simpler terms to see who gains, who loses, and why it matters to all of us.

Why does the rupee fall against the dollar?

Let’s start with the basics. Imagine you’re planning a trip to the US and need to exchange your rupees for dollars. Yesterday, $1 cost Rs 83, but today, it costs Rs 84. That change in price is the exchange rate—a number that moves based on supply and demand for each currency.

Right now, the demand for the dollar is high, whether it’s because of rising US interest rates or global uncertainty. As a result, the dollar strengthens, and the rupee weakens. This time, the rupee’s depreciation to Rs 84.4 per dollar marks its steepest fall ever, reflecting both a strong dollar and a struggling rupee.

Why is the dollar rising?

The US dollar isn’t getting stronger by accident. The Federal Reserve has been aggressively raising interest rates to tackle inflation, making dollar investments more attractive to global investors. Add to that US policies encouraging investments—like tax cuts and deregulation in the past—and it’s no surprise that demand for the dollar is soaring, putting currencies such as the rupee under intense pressure.

Who loses when the rupee falls?

1. India’s importers and trade deficit

India buys a lot of its essential goods—87 per cent of our crude oil, for example—using dollars. In financial year (FY) 2024, we spent an eye-watering $134 billion on oil imports. As the dollar gets stronger, our oil bill grows too. And since oil is the backbone for fuel products such as petrol, plastics, and fertilisers, those higher costs have a ripple effect on the economy. This is called imported inflation, and it hurts all of us by making everyday life more expensive.

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The story doesn’t stop there. India’s trade deficit—the gap between what we buy and sell to the world—keeps widening. With imports outpacing exports, a weaker rupee means paying more for goods such as electronics and chemicals. It’s a strain on the country’s wallet, just like it is on ours.

2. Companies borrowing in dollars

Here’s a double whammy. Companies that borrowed in dollars now owe more in rupees. If a business took out a loan when $1 was Rs 83, they now need Rs 84.4 to pay back the same amount. India’s external debt hit $682 billion in June 2024, up by $13 billion in just three months. For some businesses, this could mean financial trouble.

3. Rising inflation puts pressure on everyone

When imports cost more, so do the goods you buy every day. Whether it’s petrol or vegetables, rising inflation eats into your budget. Fortunately, the Reserve Bank of India (RBI) is stepping in. To ease some of this pressure, the RBI recently reduced the Cash Reserve Ratio (CRR) by 50 basis points (bps), putting Rs 1.16 lakh crore into the banking system. This move aims to keep money flowing, even as prices rise.

4. Risk of a regional currency war

A strong dollar can shake up global trade. Remember the US-China trade war in 2018? The US imposed tariffs, China’s currency weakened by 10 percent, and Asian markets were thrown into turmoil. If something similar happens again, India could feel the shockwaves. The International Monetary Fund (IMF) says a 10 per cent rise in the dollar reduces output in emerging economies by nearly 2 per cent within a year—a hit India can ill afford.

Who wins when the rupee falls?

1. Export-orientated industries

Not everyone loses when the rupee weakens. Exporters earning in dollars—like information technology (IT) services, pharmaceutical companies, and textile businesses—benefit. Here’s how:

● IT Services: Firms like Infosys and Tata Consultancy Services (TCS) make most of their money in dollars. When those dollars convert to rupees, it’s a windfall.

● Pharmaceuticals: Many Indian drugmakers export to the US and Europe, making exchange rates work in their favour.

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● Textiles: With global buyers looking beyond China, Indian textile companies are more competitive thanks to a weaker rupee.

2. Foreign investors in India

Foreign investors love a bargain, and a weaker rupee lets them get more for their dollars. This could boost Indian stocks and attract more investment into our economy.

The bigger picture

While some sectors win, the overall story leans negative. Higher import costs burden households and businesses alike, while inflation gnaws at savings. Companies with dollar loans face growing debts, raising the risk of instability.

This is where the RBI’s role becomes crucial. By keeping the repo rate steady at 6.5 per cent and reducing the CRR, the central bank is striking a fine balance between controlling inflation and supporting economic growth. These moves aim to cushion the blow of a falling rupee without risking long-term stability.

What does it mean for you?

A weak rupee and strong dollar aren’t just headline fodder—they touch your everyday life. From pricier petrol to costlier groceries, inflation is real. On the bright side, if you have investments in IT or pharmaceutical stocks, this might be a good time for your portfolio.

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Understanding these dynamics isn’t just for economists. It helps you budget smarter, invest wisely, and prepare for what’s ahead. It also highlights how the RBI’s policies, like liquidity support through CRR cuts, aim to steady the ship.

Final thought

The tug-of-war between a rising dollar and a falling rupee creates winners and losers. Exporters may celebrate, but importers, businesses with dollar debts, and everyday consumers face challenges. These currency moves aren’t just numbers—they’re a reflection of global forces shaping our economy and lives. By taking proactive steps, the RBI shows that even in turbulent times, there are ways to keep things balanced.

Chakravarthy V. is co-founder and executive director at Prime Wealth Finserv

Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.