Volatile Dollar & Euro Add To Rupee's Woes

The reversal came ahead of the Reserve Bank of India's (RBI) 0.25 per cent repo rate cut — an attempt at stabilisation at a time of global economic turmoil. The central bank's officials said the move "may set the tone for currency movements in the weeks ahead".

However, given the ongoing tariff war and its everyday fall-out, across-the-board volatility in exchange rates of various currencies seems inevitable. The currency volatility is expected to hit several exporting sectors, in some cases by 2.5 per cent of their incomes, according to a report by rating research agency CRISIL.

The Rupee has jumped from Rs 83.81 to the dollar on October 1, 2024, to Rs 87.40 on February 28, 2025, before appreciating to Rs 86.61 at 1430 hours on April 9, 2025.

Between March 10 and April 8, the Indian rupee gained strength against major global currencies, including the US Dollar, British Pound, Euro, and Chinese Renminbi, before easing slightly in early April.

Volatile Dollar

The Dollar-to-Rupee exchange rate fell steadily from Rs 87.29 on March 10 to Rs 85.25 by April 3, indicating a strengthening Rupee. However, the trend reversed modestly in the first week of April, with the Dollar recovering to Rs 86.24 on April 8.

The rise in the Rupee vis-à-vis the US Dollar in March was a combined effect of the Federal Reserve Bank's decision to hold interest rates steady, expectations of future rate cuts, and an increase in the RBI's foreign exchange reserves due to its market intervention through Rupee-Dollar swaps.

This subsequently resulted in strong foreign institutional (FII) inflows in equities and bonds. Indian equities received over Rs 32,488 crore in the month of March, and around US$ 3 billion flowed into Indian bonds. With all these inflows, the Rupee got stronger.

However, by the end of March, it was clear that Trump's tariff threats were not empty ones, and it would result in a dip in the US trade volume. That means the US Dollar would be sparsely available in the global market in the immediate future.

Due to that supply pressure, the Dollar has started inching upwards by the beginning of April.

Kings & Queens Have Their Ups & Downs

A similar movement was seen against the British Pound. The GBP/INR rate dropped from a high of Rs 112.95 on March 12 to Rs 109.19 by April 7, with minor fluctuations in between. 

The British Pound, in any case, was facing pressure even before the scramble for cover after the Trump tariffs began. On top of the economy's unresolved trade issues with the European Union (EU), their expectation of reaching an agreement with the US failed.

The Rupee strengthened relative to the Pound in this backdrop, bolstered by strong March FII inflows as mentioned earlier. However, once the chaos ensued after the tariff announcement, the relative global stability of the British Pound weighed in and got the better of the Rupee in early April. 

However, there are distinct early signs of volatility in the Rupee-Pound movement.

Eurozone Too Topsy Turvy

The EUR/INR rate fell from Rs 95.18 on March 11 to Rs 92.06 by March 26, before inching up and regaining up to Rs 94.68 on April 8.

The Rupee surged ahead vis-à-vis the Euro in March, as uncertainties gripped the Euro zone following various adverse developments in the Russia-Ukraine war. Compared to that, India's macroeconomic fundamentals strengthened in initial estimates. That resulted in a steady Rupee strengthening in March.

However, Eurozone inflation dipped to 2.2 per cent in March, reducing pressure on the ECB to cut rates further, supporting the euro's value. Further, post-Trump tariffs, various experts are expecting a trend towards a "tripolar world" where the Euro gains prominence alongside the US Dollar and China's Renminbi.

Reduced trust in the Dollar, due to US isolationist policies, is likely to contribute to this trend. The bounce-back in the Euro value vis-à-vis the Indian rupee needs to be observed in this context.

The Renminbi-Rupee Story

The Rupee also gained against the Chinese Yuan (Renminbi), as the CNY/INR rate declined from Rs 12.06 on March 11 to Rs 11.71 on April 3, then edged up to Rs 11.78 by April 8.

However, there is relative stability in the Renminbi-Rupee movement. Ironically, the trade between China and India is expected to be relatively more balanced and stable under the changed circumstances. 

On top of that, the People's Bank of China (PBOC) maintained a calibrated approach to manage the renminbi's exchange rate despite external turmoil. This has helped in preventing sharp movements in the Renminbi, ensuring stability against currencies like the Rupee.

Why Have Currencies Turned Volatile

Biswajit Dhar, former Head of the Centre for WTO Studies at the Indian Institute of Foreign Trade, explained, “President Trump’s actions on the tariff front are reducing imports into the US and may increase exports to the rest of the world. This move has seen the Dollar fall.”

Dhar, who has been a director of Exim Bank, added, “The bigger problem for the world is that the Dollar is the main reserve currency and most nations, including India and China, hold significant amounts of Dollars, and with the fall in the value of the US currency, they are in a fix. So, there is also a simultaneous move to prop up the Dollar. All these mean the greenback will be volatile for some time to come.”

He argued that the US should have instead “done something like the Plaza accord of 1985, which would have allowed the Dollar to depreciate in an orderly fashion.” The accord, named after the hotel where it was signed, was a deal between the US, France, UK, Germany, and Japan to allow the Dollar to fall in a planned manner over a two-year period, as many felt it was overvalued.

The volatile global currencies mean that those firms involved in global export or imports will see a hit to their earnings, and people in general will find most goods imported into their countries turning costlier.  

“A falling Dollar reduces the purchasing power of the greenback. So, for instance, you can buy less oil and gas with it, which means oil prices will eventually go up, which in turn will hit consumers and raise prices,” explained Vikram Johri, a foreign exchange dealer. 

Government officials said that the RBI had been trying to shift to more bullion in its reserves over time. It bought 72.6 tonnes of gold in 2024, compared to 18 tonnes in 2023, in order to “have a more solid reserve situation which will not be hit so much by currency fluctuations.”