Rupee slides, still better than other currencies: Is India, China growth threatening dollar?

The fall of the Indian rupee and other currencies against the dollar has once again raised the important question: should the dollar determine the value of other currencies in today's landscape?

In Short

• Rupee hits new low of 84.36 against the US dollar
• Other currencies like Brazilian real and Russian ruble also fall
• Local currency trade gains support from global leaders

The Indian rupee is down, but so are other major currencies against the US dollar. The rupee closed at a new low of 84.36 against the dollar on November 7 according to the International Monetary Fund. Despite its downward trajectory, however, the rupee is still well-placed against major currencies such as the Brazilian real, the Russian ruble, the Japanese yen, and the Canadian dollar.

The Indian rupee has slid by 1.1 per cent against the dollar since January 1. In contrast, the Brazilian Real fell by around 18 per cent, the Russian ruble by 8.6 per cent, and the Japanese Yen by 6.4 per cent.

DOLLAR INDEX MAY RISE FURTHER

One reason for foreign currencies getting weaker is the strengthening of the US dollar. The dollar index has surged 2.26 per cent since the beginning of this year, and it is expected to rise further.

“Trump's win certainly means a stronger dollar against currencies of countries that could be affected by tariffs. Given that there will almost certainly be an imposition of tariffs of some kind on imports, the dynamics of how the US trades with the rest of the world will change,” according to Abhishek Goenka, Founder & CEO of IFA GLOBAL, a foreign exchange and treasury management firm. From China to the European Union, countries have started to rethink their strategies as Trump's 'America First' approach reshapes economic alliances and rivalries.

SHOULD CURRENCIES BE VALUED AGAINST THE DOLLAR?

The fall of the Indian rupee and other currencies against the dollar has once again raised the important question: should the dollar determine the value of other currencies in today’s landscape? There were times when the United States ruled the world economically. However, many other economic powers, including India and China, have emerged over time.

In terms of GDP based on purchasing power parity, the United States comprised 20.2 of the world’s share in 1990. This fell to 16.7 per cent in 2010, and further to 14.8 per cent in 2023. In contrast, China comprised a 3.8 per cent share, which rose to 13.8 per cent in 2010, and 18.8 per cent in 2023. India’s share too rose from 3.5 per cent in 1990 to 7.9 per cent in 2023.

LESS HOPE FOR RUPEE TO RECOVER

The rupee may continue to stay at a weak level for some more time. Foreign exchange and interest rates will be the first casualty, with equities only temporarily rejoicing the Red Sweep, said Madhavi Arora, chief economist at Emkay Global. “It is difficult to assume India charting an appreciating bias in the medium term when most of Asia would be having a weaker foreign exchange bias,” Arora added.

NEED FOR TRADE IN LOCAL CURRENCY

Where the dollar is strengthening, the need for trade in local currency is more evident now. World leaders like Russian President Vladimir Putin and Indian President Narendra Modi have been very vocal about it.

“We will contribute to enhancing the role of BRICS in the international monetary system, expanding interbank cooperation and expanding the use of national currencies in mutual trade,” said President of the Russian Federation Vladimir Putin at the start of Russia's BRICS Chairmanship.

Indian Prime Minister Narendra Modi also said, “We welcome efforts to increase financial integration among BRICS countries. Trade in local currencies and smooth cross-border payments will strengthen our economic cooperation.