Why the rupee is plumbing new lows

The United States is the most indebted country in the world. The annual budget deficit is close to $2 trillion. This is the net borrowing requirement of the US Treasury for this year. It also has to repay older debt, of which $9 trillion is maturing this year. So, the gross borrowing requirement is over $10 trillion this year.

This debt is funded by American and foreign investors, and includes the foreign exchange reserves of the world. Imagine the stress it puts on global dollar surpluses and savings. The risk-free interest offered to attract financial flows toward US bonds is quite high — currently about 5 per cent.

For any other country, such a high debt load would have led to a downgrading of its sovereign rating. But this is the USA and its currency is still the king of the world. It still attracts capital from the rest of the world. But the allure of dollar assets is certainly on the wane. The share of global foreign exchange reserves held in dollar assets has gone down from 72 per cent to 58 per cent in the past 20 years — so, the downtrend is unmistakable. Which is why the world is talking about ‘de-dollarisation’.

This year, there are visible effects. The dollar index (DXY), which measures the value of the US dollar against a basket of six major currencies, fell 11 per cent in the first half of 2025 — its sharpest six-month slide in 50 years.

The other big news is the rise of gold — for the first time, the value of reserves in gold exceeds that in USD assets. The statement hides a subtler truth. According to the IMF, 58 per cent of disclosed global forex reserves were still in dollars as of 2024, far ahead of any other currency. But thanks to a historic rally in gold, the market value of official gold holdings has gone above the holdings of US Treasuries in global reserves. That’s not the same as gold overtaking all dollar assets in reserve portfolios but it is still symbolically powerful.

The political catalyst that nudged many reserve managers into reviewing their dollar holdings was the freezing of Russia’s sovereign dollar assets after its invasion of Ukraine in 2022, followed by moves by G7 and EU nations to harness profits from those assets to finance Ukraine. The message is clear: dollar-centric reserves carry geopolitical risk, and this reading of the situation has driven diversification into not just other currencies but, most visibly, gold.

All the three pillars of dollar power — trade invoicing, cross-border clearing and reserve management — are witnessing real, if uneven, diversification. Politics has amplified the trend. When BRICS leaders aired non-dollar invoicing ideas early this year, President Trump threatened retaliatory tariffs — essentially using trade policy to guard the dollar’s primacy. The SWIFT network is still the backbone for dollar clearing via New York, but alternatives to dollar-centric messaging and settlement are scaling.

China’s CIPS (Cross-border Interbank Payment System, an alternative mechanism for clearing and settlement of cross-border transactions denominated in Chinese yuan) has expanded volumes and participants; BIS-backed experiments like mBridge have already run live cross-border CBDC (Central Bank Digital Currency) transfers among central banks in Asia and the Gulf.

India has tried to translate the de-dollarisation mood into new trade plumbing. New Delhi and Moscow spent much of 2023–24 exploring rupee settlements. But progress was halting because Russia did not want to sit on large, non-convertible rupee balances. The RBI has since given more leeway, by recently allowing surplus in vostro accounts to be invested fully in Indian government securities to give partners like Russia a safer home for their rupee stock.

The main hurdle for India in scaling up rupee trade and invoicing is the partner’s appetite for Indian exports and rupee assets. India is also experimenting with the RBI’s e-rupee pilot projects, and looking at extending UPI to foreign shores. If we can stitch together compliant, bilateral CBDC or local-currency settlements with key energy and import partners, some share of trade can circumvent dollar invoicing, clearing and settlement. But this is work in progress.

The main reason rupee trade can expand only gradually is India’s heavy reliance on the US market as an export destination. The US is India’s single largest buyer of merchandise; it is also central to our services exports. That concentration makes it rational for Indian firms to keep dollars at the core of pricing, hedging and funding — even as they experiment with local-currency deals elsewhere.

Even as the dollar has weakened against a basket of major currencies, the rupee has weakened against the dollar, hitting record lows of 88.27. This means that the rupee has lost even more ground to the euro and the yen. That tells you two things: global dollar softness can coexist with rupee softness, and India’s external price signals are being driven by country-specific forces (tariffs, portfolio outflows, oil) as much as by the global dollar cycle.

President Trump is pressuring India to cut down its purchase of Russian crude. This is the main reason for the penal tariffs of 50 per cent on Indian goods. Trump is asking the G7 nations to follow suit and penalise India. The rupee has consequently slid to fresh lows, as markets have factored in weaker export earnings and persistent dollar demand from importers.

India’s ‘de-dollarisation’ strategy cannot be to wage a crusade against the dollar but to build resilience and bargaining power. In practical terms, it means:

• Targeted local-currency invoicing where counterparties truly want Indian goods or rupee assets

• Wider, safer channels for holding and deploying rupees abroad (the RBI’s vostro tweaks are an example)

• Reserve diversification into gold and high-quality non-dollar assets

• Investing in payment rails (including CBDC-based ones) that let Indian banks and firms route around chokepoints when geopolitics turn rough

None of this eliminates the dollar’s centrality any time soon. But it does chip away at single-point fragility.

There is a final paradox worth stating. A weaker dollar helps US exporters. This, Trump actively wants — yet Washington has redoubled efforts to defend the dollar’s centrality — in invoicing, clearing and reserves — sometimes via trade threats. For countries like India, the correct response isn’t ideological. It is to keep options open, deepen domestic capital markets and make the rupee useful to foreigners — by offering scale, liquidity and predictable rules.

Ajit Ranade is a noted economist. More of his writing may be found here

Article courtesy: The Billion Press