DXY vs USDINR

Since the beginning of the year 2025, the exchange rate of India Rupee (INR) has fallen against the currencies of most of our major partners. Though, USDINR (INR vs USD) is the most keenly watched exchange rate (since a majority of our forex reserves, external debt and external trades are USD denominated), INR has depreciated most against EURO (EUR). The extent of depreciation against Japanese Yen (JPY), Chinese Yuan and British Pound (GBP) is mostly similar.

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Notwithstanding the views of the finance minister that “INR is not weakening, but the other currencies are appreciating”, the INR depreciation is a matter of concern to a large majority of Indian investors. Since we are traditionally a current account negative economy, on the net basis, INR depreciation adversely affects the economic fundamentals. Besides, eroding the confidence in the economy, —

·         INR depreciation makes many things expensive for the Indian households – appliances, toys, lights, clothes, footwear, medicine, communication, travel, studies abroad, gold, silver, etc.

·         A sharp depreciation discourages foreign investors from investing in INR assets.

·         The cost of debt servicing rises for the corporates which have taken debt in foreign currencies, impacting the profitability adversely.

On the positive side, it helps the exporters (textiles, IT services, pharmaceuticals, automobile, etc.). In fact, as per various estimates, INR depreciation has overall positive impact on the Nifty50 earnings, as several large companies derive a substantial part of their revenue from export of goods and services. On a lighter note, INR strength might help household budgets of investors, but might not be good for the health of their equity portfolios.

DXY vs USDINR

One question that I am frequently asked, why the exchange rate of INR vs USD (USDINR) is depreciating, while the USD (DXY – a trade weighted index for USD) itself is depreciating?

In my view, it is not a fair comparison. USDINR is a bilateral exchange rate between the USD and INR. Whereas, the US dollar index (DXY) represents a trade weighted exchange rate of the USD against six major currencies, viz., EUR, JPY, GBP, CHF, CAD, and SEK.

Moreover, If USD falls -5% vs EUR/JPY, but INR falls -7% vs USD, then effectively INR is even weaker than USD → hence USDINR still rises.

It may also be pertinent to note that while the trade with the US forms almost one fourth of India's total external trade, India accounts for just 3% of the Us external trade. Hence, comparing USDINR with DXY might not be a good idea.

Why INR is relatively weaker

The rupee isn’t just about the dollar’s global strength — it reflects India’s external balance, capital flows, oil dependency, and RBI policy. So even if the USD is weakening broadly, INR can still depreciate if India-specific pressures are stronger.

Oil prices & trade deficit: India imports ~85% of its crude oil. Higher oil prices mean more dollar demand → rupee pressure.

Capital outflows: If foreign investors pull money from Indian equities or bonds, they convert INR to USD. Even modest outflows can weaken the rupee.

Interest rate differentials: If the Fed is cutting slower than RBI or US yields remain higher, the USD stays attractive for investors vs INR.

Safe-haven flows: During global uncertainty, funds flow into USD and US Treasuries, even if the dollar index is down — EM currencies including INR often suffer.

RBI intervention strategy: Sometimes the RBI allows gradual depreciation to maintain export competitiveness and conserve reserves.