When I started my career in wealth management, the rupee traded at ₹45 to a dollar.
I still remember asking relatives visiting from the US to bring back products. It was a simple way of taking advantage of the price arbitrage —many products were priced much lower in the US than in India — and over time, converting those values between rupees and dollars became second nature to me.
Last week, the rupee touched its lowest ever level of 88.5 against the dollar. For many, it felt like a headline to scroll past. But for those of us who’ve watched currencies shape inflation, trade, and portfolio returns, it was a moment worth pausing on. After all, exchange rates ripple far beyond macro indicators — they decide the price of fuel, the cost of a vacation abroad, even what families pay for a child’s education overseas.
The world is going through geopolitical upheavals of alarming proportions — tariff wars, shifting alliances, and a slow unravelling of the globalisation we once took for granted. In such times, a currency becomes a live barometer of confidence, resilience, and risk.
Which brings me to a simple but important question: what really makes a currency move?
In this edition of the Create Wealth newsletter, let’s break it down:
- Simplifying currency movement
- The asymmetry of appreciation vs depreciation
- When currencies become weapons
- What’s happening right now
- Macro-impact of currency movement
- Sectoral impact of currency movements
- The big picture
Let’s dive in.
Simplifying currency movement
At its core, a currency is simply a price — the price of one country’s money in terms of another. Just as the price of a stock reflects the demand and supply for that company’s shares, an exchange rate reflects the demand and supply for a country’s money.
When demand for a currency rises, it strengthens. When supply overwhelms demand, it weakens. Currency movements usually boil down to five main factors:
1. Interest rate differentials
Money flows to where it earns the best return. Higher rates attract foreign capital, lower rates drive it away.
Real example: In 2013, when the Fed hinted at reducing stimulus, money rushed out of India so fast that the rupee fell 20% in four months. Why? Because the interest rate advantage was about to shrink.
2. Inflation differentials
Currencies mirror purchasing power. Countries with chronically higher inflation see their currencies weaken over time to stay competitive.
What’s happening now: Inflation spiked after the pandemic due to excess spending and supply chain shocks.But the RBI has reined it in, with July figures at an eight-year low— notably, below current US inflation levels.
3. Capital flows
FDI, FII and remittances add or subtract from the pool of foreign exchange. Sustained inflows support the domestic currency, and outflows weaken it.
The current problem: Foreign investors have pulled out nearly ₹4 lakh crore from Indian equities over the past year. That’s a massive supply of rupees hitting the market.
4. Trade balance
If imports exceed exports, more dollars go out than come in. Persistent deficits weigh on the currency, surpluses strengthen it.
The twist: This isn’t necessarily bad. Growing economies typically run trade deficits as they import capital goods and technology.
5. Sentiment and geopolitics
Markets also move on perception. Elections, tariffs, sanctions, or wars can swing currencies even without immediate changes in fundamentals.
Current sentiment: Concerns about US trade policy, slowing domestic growth, and global risk-off behavior are all weighing on the rupee—regardless of India’s actual economic performance.
Bringing it all together: if the rupee were a company, its “stock price” would be the exchange rate. Strong fundamentals — low inflation, steady inflows, healthy trade — support the price. Weak fundamentals — high inflation, outflows, persistent deficits — drag it down.
The asymmetry of appreciation vs depreciation
Most people get the basics of currency moves wrong. At first glance, they look like a mirror: if the rupee weakens, the dollar must have strengthened by the same amount. But exchange rates do not work like that. The math is not symmetrical.
Take a simple base: ₹100 = $1.
- If the rupee depreciates and the rate moves to ₹150 = $1, the dollar has strengthened by 50%. But the rupee has not fallen by 50%. Earlier, ₹100 got you $1. Now it gets you $100 ÷ 150 = $0.67. That is a 33% depreciation in the rupee’s value.
- If the rupee appreciates and the rate moves to ₹50 = $1, the dollar has weakened by 50%. But the rupee has not doubled. Earlier, ₹100 got you $1. Now it gets you $100 ÷ 50 = $2.00. That is a 100% appreciation in the rupee’s value.
A 50% rise in the dollar does not mean a 50% fall in the rupee. In our example, the dollar strengthened by 50%, but the rupee weakened by only 33%. On the other side, when the dollar fell 50%, the rupee actually doubled in value.
The lesson is simple: currency moves are reciprocal, and the percentages aren’t intuitive. This is crucial for investors, as a 10% fall in the rupee doesn’t just mean your dollar assets are worth 10% more; the math works differently and can significantly impact your real returns.
When currencies become policy tools
Currencies may look like mere exchange rates on a screen, but behind them lie national strategies and choices. In the hands of nations, they are weapons — wielded to gain advantage, defend competitiveness, or project power.
Take China. For decades, it has been accused of keeping the yuan artificially undervalued. Why? Because a weaker yuan makes Chinese exports cheaper in global markets. It allowed factories in Shenzhen and Guangzhou to undercut rivals everywhere else, building the export engine that powered China’s rise. Washington even went so far as to label Beijing a “currency manipulator” at different points. Labels aside, the fact remains that China treated its exchange rate as a deliberate tool to grab global market share
Now consider Japan. The yen has long served as the world’s “funding currency.” With near-zero rates at home, investors borrowed yen to chase higher yields abroad — a global carry trade that made the yen central to capital flows. For Japan, this meant ultra-cheap money at home, a weaker yen and steady demand for the currency that let the government run massive debts without spooking markets.
To understand why nations manipulate or manage their currencies, you need to see the twin engines that drive them: the current account and the capital account.
Once you see this equation, the next step becomes clearer: what nations do with their surpluses.
Take China and Japan. Both have run persistent current account surpluses for decades. Where did that money go? Straight into the capital account — and most of it parked in the safest, deepest market in the world: US Treasury bonds.
Today, China holds over $756 billion in Treasuries, and Japan holds nearly $1.1 trillion
By buying American debt, Beijing and Tokyo are effectively financing US consumption, keeping the dollar strong and their own currencies competitive.
By accumulating vast holdings of US debt, China and Japan have created leverage. That is why the US–China economic relationship is often described as “mutually assured dependence”. America needs China to keep buying its debt; China needs America to keep buying its goods.
What the balance of payments really shows us is: trade creates flows, and flows create leverage. Nations that run surpluses accumulate power over those who borrow.
What’s happening right now
When President Trump took office earlier this year, markets expected a stronger dollar. The early rhetoric was about cutting wasteful spending and bringing down America’s public debt — now hovering near $37 trillion. On that enthusiasm, the Dollar Index (DXY) — a benchmark of the US dollar’s strength against major global currencies — jumped to levels above 110.
But since then, policy has been anything but consistent. Between tariff announcements, tax-cut promises, and fiscal giveaways, markets have realised that US deficits are unlikely to shrink. The result: the dollar has entered a phase of structural weakness, with the DXY sliding back towards 97–98.
Yet, here’s the anomaly: in a year when the dollar has weakened, the rupee has still underperformed. Year-to-date, the rupee has slipped close to ₹88.5 per dollar, losing about 3%, while many emerging market peers have gained. The Mexican peso, Brazilian real, Indonesian rupiah, and Korean won have all appreciated against the dollar. In other words, the rupee isn’t just losing to dollar strength; it’s losing to dollar weakness.
So what explains the rupee’s underperformance?
- Tariffs have raised questions on trade competitiveness.
- Weak equity markets and FII redemptions — foreign investors have sold close to ₹4 lakh crore in the cash market over the last one year
- Fiscal risks linked to tax cuts and revenue pressures.
Put together, this explains why the rupee has touched record lows even as the dollar itself has softened.
This is the paradox of today’s currency market: the global tide is turning against the dollar, but the rupee has still lost ground.
And that gap tells us more about sentiment towards India right now than about the dollar itself.
Macro-impact of currency movement
Every rupee move sets off a chain reaction. Some effects are immediate, like costlier oil imports. Others take time, like trade balances adjusting or policy shifts. And then there are the indirect consequences — on equity flows, on rates, on sentiment. Let’s map them out.
Short-term
- Oil is the transmission channel. With crude making up over a quarter of our import bill, even small rupee shifts alter transport and energy costs.
- RBI’s credibility has anchored stability. A $700 billion reserve buffer and timely interventions have kept imported inflation far more contained in India than in most emerging markets.
- External borrowing costs rise. Indian firms often tap cheaper dollar loans abroad. A weaker rupee makes repayments costlier and unhedged exposures can dent profitability.
Medium-term
- Trade linkages will redefine the baseline. As India secures new supply routes and settles more trade in rupees, the currency will begin to find a natural anchor.
Second-order effects
- Equity flows reflect sentiment. FII selling has weighed on markets, though domestic investors have stepped in as a counterbalance.
- Policy stays cautious. Inflation pressures may delay rate cuts, but India has avoided the runaway spirals seen elsewhere.
Closing thoughts- The bigger picture:
The rupee’s journey is often framed as a slide, but that lens misses the larger truth. A currency is ultimately a mirror of an economy. And India’s economy today is far stronger, more diversified, and more globally relevant than at any point in its history.
Inflation is under control, reserves are ample, and the RBI has earned credibility by steering through volatile cycles without losing its anchor. Domestic investors are now a stabilising force in markets, cushioning the impact of foreign flows. And as India integrates deeper into global supply chains and trade routes, the rupee’s role in commerce will only expand.
This trajectory is not a one-way decline. It is about a currency finding its rightful place in line with the country’s rise. Over time, the rupee has every chance to stabilise and even strengthen as India moves towards advanced economy status and its financial depth catches up with its growth.
Disclaimer – The information provided herein is intended solely for educational purposes and should not be construed as investment or financial advice. This material was prepared using publicly available information, internally developed data, and other sources deemed reliable. Although reasonable care has been exercised to present reliable data, Dezerv cannot guarantee its accuracy or completeness. All opinions, data, graphs, charts, and analyses contained herein are as of the date and are subject to change without notice. They reflect the current market views and do not represent a promise or guarantee of future performance. All trademarks, logos, and brand names mentioned are used for identification purposes only and do not imply endorsement or recommendation.