Rupee’s pain has a global address

The rupee was Asia’s worst-performing currency last calendar year, depreciating by more than 6 per cent against the dollar (nearly 10 per cent in FY26). This is striking because India was simultaneously the fastest-growing major economy in the world. A currency does not usually weaken when an economy is thriving. When it does, the explanation lies not at home but abroad, in the workings of the global dollar system itself.And that system has rarely looked more powerful. The dollar enters the second half of 2026 as the world’s best-performing major currency, lifted by expectations of Fed rate hikes and record inflows into US assets. Yet beneath this strength lies a deeper, more contradictory shift, one that explains why the rupee’s pain has a global address.Credibility gapA single number captures the dollar’s position today. Its international usage index stands at around 65, against a US share of global GDP of 26 per cent and global trade of 13 per cent. This means the dollar’s financial footprint is more than double its economic footprint.Meanwhile, China’s currency usage index barely registers at 3-4, despite accounting for 17 per cent of global GDP and 13 per cent of global trade. The euro area is the only case where the three measures are roughly in balance. In other words, the world does not have a dollar problem. It has a renminbi credibility problem. Capital controls, geopolitical risk, and shallow bond markets make it structurally unsuitable at scale. The dollar’s dominance, then, is not a choice but a constraint.The Hedge and the TrapYet quietly, in the one place where countries do have discretion, something is shifting. The dollar’s share of global foreign exchange reserves has fallen from 57 per cent in 2016 to roughly 40 per cent by end-2025, with gold now accounting for 24 per cent of total reserves. The headline looks dramatic. The reality is more revealing.Chart 1 reveals a striking divergence. Physical gold holdings have barely moved over 25 years, rising less than 12 per cent, yet gold’s share of reserves has surged from 10 per cent to 24 per cent since 2022, almost entirely on price.What does this imply? Central banks are not buying gold; they are holding what they have while letting its share drift higher. The 2022 inflection is not accidental. It marks the year the G7 froze Russia’s $300 billion in reserves, weaponising the dollar-based system against a sovereign state. Put another way, central banks are not diversifying because the dollar is weakening. They are hedging against the risk that it could be turned against them.This is the paradox at present. The dollar’s slow loss of share as a store of value is structural; its current strength is cyclical, driven by rate expectations and an AI-fuelled rush into US assets. Both are true at once. If the reserve story is about slow hedging, the transactions story is about immediate, unavoidable exposure. And this is where India’s position is most uncomfortable.Chart 2 shows export invoicing by region. The Americas invoice close to 97 per cent in dollars, Asia-Pacific 74 per cent, and the RoW 79 per cent. The Asia-Pacific number deserves more scrutiny: China is the largest trading partner for most economies here, yet the renminbi barely registers in invoicing. This implies that Asian economies, including India, are paying a dollar tax on trade increasingly conducted with a non-dollar partner.What does this mean for India? Given its trade composition — heavily weighted toward commodity imports, capital goods, and dollar-denominated external debt — its effective dollar invoicing exposure sits closer to the RoW average of 79 per cent than the Asia-Pacific 74 per cent.The RBI built up a record net-short dollar forward book of around $110-115 billion this year, and reserves fell more than $46 billion from their February peak. Those numbers, of course, are not a sign of mismanagement. They are the arithmetic of being locked into a dollar-invoiced trading system when global dollar liquidity tightens.But what does India’s reserve buffer actually represent? Unlike China, Japan, or Korea, whose reserves were built on persistent export surpluses, India’s reserves of $682.3 billion represent accumulated confidence of foreign investors and lenders. That confidence is valuable, but also reversible. When the scramble begins, every stress event forces countries to reach for the same currency simultaneously. Diversifying reserves offers no relief when dollars are still needed to pay every bill.Path forwardReserves are larger today and the banking system more resilient than during the Taper Tantrum. But the structural vulnerabilities have deepened.The RBI’s response has been sophisticated, but so far, it remains a crisis playbook, not an external sector strategy. Banks are being encouraged to mobilise foreign currency deposits, public-sector firms nudged to raise foreign loans, and foreign investors offered lighter taxes on government securities. The aim is clear: increase dollar supply and signal that a one-way bet against the rupee is costly.When the central bank absorbs hedging costs, the burden falls on the public exchequer. The taxpayer effectively provides rupee-depreciation insurance to a narrow set of depositors and borrowers. That may be defensible in some cases but cannot become routine. Reform, then, is necessary.First, reduce the structural dollar drain. Edible oils, fertilizers, electronics, and gold are the arteries through which dollars leave India. Households importing gold as savings are voting against domestic financial assets, and that requires deeper, safer financial products in response.Second, build export-surplus sectors beyond IT services. India as a manufacturing destination has not materialised at scale. FDI has fallen from 3.6 per cent of GDP in 2008 to less than 1 per cent in 2024, with the China+1 shift benefiting East Asia far more than India.Third, treat energy as a strategic priority, not just a cost line. Oil and gas imports are India’s largest dollar outflow. Accelerating the shift to renewables and electrified transport is no longer only a climate goal; it is external-account insurance.Fourth, cultivate stable, non-debt sources of foreign currency. Tourism is the most underused: unlike portfolio flows, its earnings do not reverse overnight and carry no repayment obligation.Finally, pursue rupee internationalisation with strategic clarity rather than political symbolism. India’s ambiguity on BRICS currency arrangements is understandable. But it should not prevent sensible rupee trade settlement in corridors where India has genuine bargaining power.Bhaduri is Professor, Madras School of Economics (MSE), Chennai; Anand is a PhD Scholar, MSE, ChennaiPublished on July 3, 2026