Rupee Recovers from All-time Low Amid Dollar Index Correction

Learn about the Dollar Index, its significance in global finance, how it tracks the value of the US dollar against major currencies, and its impact on international markets.

Table of Contents

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.