The Rupee Is Falling. The Dollar Is Cracking. Both Stories Are Being Read Wrong
While investors remain concerned about the depreciating Rupee, we got Divam Sharma, the co-founder of Greenportfolio, a Gurgaon-based Portfolio Management Services (PMS) company, to explain why this development shouldn’t be read as a concern:
Two news cycles are running in parallel right now. Most Indian investors are reading them as one story when they are actually two.
The rupee is at a record low against the dollar. Headlines are calling it a crisis. At the same time, the dollar’s global dominance is being challenged. The BRICS is expanding its settlement infrastructure, with central banks buying gold at record levels. Countries sanctioned by the West are thriving using workarounds that defies the Dollars dominance. The news calls this a paradigm shift.
Both narratives have truth in them. However, both are being misapplied to Indian portfolios.
Here is the core distinction worth holding onto. The rupee story is cyclical. The dollar story is structural. Confusing the two is the most expensive mistake an Indian investor can make right now.
Start with the rupee
It touched 96.8 against the dollar on May 20 and has since stabilised near 95.5, helped along by active RBI intervention. The numbers remain uncomfortable for policymakers, as Brent crude has moved past $115 a barrel, with India having to shell out more for almost 85% of its oil imports. Foreign portfolio investors have pulled over $19 billion net from Indian markets this year, and those outflows translate directly into dollar buying and rupee selling. The dollar itself has been firmer than most forecasters expected, mostly because US inflation has refused to come down on the schedule the Fed wanted. India did not cause any of this. India is responding to it.
The Reserve Bank of India has deployed somewhere between $16 and $18 billion in interventions and held the repo rate steady at 5.25%. That is not the behaviour of a central bank in distress. It is the behaviour of one managing an external shock with the tools it has.
The rupee will recover. When oil normalises, when foreign flows stabilise, when the dollar’s cyclical strength fades, the currency finds a new range. This has happened thrice in 2013, 2018 and again in 2022. Now it is happening again.
That is the cyclical story. Now the structural one.
The dollar’s share of global central bank reserves has fallen from 73% in 2001 to under 58% today. Read that again. That is not noise. It is a 24-year decline, and the rate has accelerated since 2022. Over the last two years, central banks have bought more gold than in any comparable period since the 1960s. These are the most informed and most patient buyers of capital in the world. They are voting with their reserves, and the vote has been consistent for some time now.
Quietly, in the last five years, an entire layer of bilateral trade settlement has been built that did not exist before. India now has active rupee trade settlement with over 22 countries. Russia and China have been settling the majority of their bilateral trade in non-dollar currencies for two years. Saudi Arabia has begun accepting yuan-denominated payments for selective oil exports. None of these is individually transformative. Put them together, and a parallel rail is being built next to the dollar one. Slowly. Deliberately. Irreversibly.
To be clear, the dollar is not going to be replaced. Anyone telling you it is, is selling something. The dollar still settles 88% of global FX trades, still funds the deepest liquidity pool in the world, and still acts as the reserve of last resort when things go wrong somewhere. None of that is at risk.
What is happening is more interesting. The dollar’s share is shrinking, even as its existence remains intact.
The world is now moving from the conventional dollar-based model to a dollar-plus model. This will be a slow, multi-decade event that may not be easily noticable.
So where does India sit in this story?
Not where most emerging markets sit. Brazil and Argentina are structurally tied to dollar cycles. Their debt, their commodity revenue, and their reserves all move with the dollar, and there is very little they can do about it. China is trying to build a parallel system. Its currency ambitions are explicit, its trade settlement infrastructure carefully constructed. China has picked a side.
India is in a rare third position.
We benefit from a stable dollar. Most of our trade, our reserves, and our market liquidity sit on dollar rails. A sudden dollar collapse would damage us in the short term, and we should be honest about that. At the same time, we benefit from partial de-dollarization. Rupee trade settlement is growing. Our gold reserves have quietly tripled over the last 15 years. Our rupee-denominated trade arrangements across the Gulf, ASEAN, and Latin America are infrastructure that did not exist a decade ago.
India is not picking sides in this currency war. India is collecting optionality. That is a rare position for a large economy to hold, and very few Indian investors are pricing it in, because they are reading the rupee headlines and assuming India is on the losing side of a global shift. The opposite is closer to the truth.
What does this mean for portfolios?
Gold deserves a structural allocation in Indian portfolios, not a tactical one. The newer case for gold is that it is becoming the reserve asset of choice for central banks at the exact moment retail investors in India are debating whether to sell theirs. Indian households hold roughly 11% of the world’s privately held gold. That is not an accident of culture. It is an instinct that happens to align with what the most sophisticated institutional buyers in the world are now doing.
Indian companies with dollar-denominated revenue stand to benefit when the rupee weakens cyclically. IT services, pharma, specialty chemicals and auto component makers are going to see margin tailwinds that the market hasn’t fully priced in yet. These are rupee weakness plays that sit alongside the de-dollarization thesis without depending on it.
Dollar-overlay strategies for Indian residents deserve more thought than they are currently getting. Buying US stocks, dollar-denominated funds, opening foreign brokerage accounts. For someone whose home, retirement, and family expenses are all in rupees, an aggressive dollar overlay introduces currency mismatch at exactly the moment the long-term direction of the dollar’s share is downward.
The rupee is not collapsing. The dollar is not dying. The world is becoming more complicated than either of those simple stories.
Indian investors who understand the difference between a cyclical currency move and a structural reserve shift will look back on this period as one of the most opportunity-rich in modern Indian markets. Those who don’t will spend the next ten years reacting to headlines that confused them about which story they were actually living through.
The cyclical rupee will recover. The structural dollar shift will continue.
Position for both.
<p>The post The Rupee Is Falling. The Dollar Is Cracking. Both Stories Are Being Read Wrong first appeared on Hello Entrepreneurs.</p>
