- The US dollar continues to dominate global finance, holding approximately 59% of global FX reserves as of 2022, far surpassing other major currencies.
- India has initiated rupee-based trade settlements with partners like Russia and the UAE, but significant capital controls hinder broader internationalisation.
- The Indian rupee has depreciated substantially over the past decade, with further weakness projected amid US tariff threats and capital outflows.
- Geopolitical trade tensions and inflation differentials exacerbate pressure on the rupee, exposing vulnerabilities in India’s external position.
- Despite rupee settlement initiatives, forecasts suggest the rupee will remain a marginal reserve currency absent structural reforms.
The enduring dominance of the US dollar in global finance remains a cornerstone of international trade and reserve holdings, even as emerging economies like India push for greater use of local currencies in bilateral deals. Recent fluctuations in the USD/INR exchange rate underscore the challenges facing the Indian rupee, which has weakened notably against the dollar, highlighting structural hurdles to its aspirations as a more prominent player in the world’s reserve currency landscape.
The Dollar’s Unrivalled Position
At the heart of global finance lies the US dollar’s status as the primary reserve currency, a role it has held since the mid-20th century. This hegemony is not merely historical; it is underpinned by the depth of US financial markets, the stability of its institutions, and the sheer volume of dollar-denominated assets traded worldwide. As of the latest available data from the International Monetary Fund in 2022, the dollar accounted for approximately 59% of allocated global foreign exchange reserves, a figure that has dipped slightly from its peaks but remains far ahead of rivals like the euro (around 20%) or the Japanese yen (about 5%).
This dominance translates into tangible benefits for the United States, including lower borrowing costs and the ability to run persistent trade deficits without immediate repercussions. For other nations, it means a reliance on dollars for everything from oil purchases to cross-border settlements, often at the expense of currency volatility in their own economies.
India’s Push for Rupee Internationalisation
India has been actively promoting the rupee in international trade to reduce dependence on the dollar and mitigate forex risks. Initiatives include allowing rupee-based settlements with select trading partners, such as Russia and the United Arab Emirates, and encouraging the use of local currency accounts for cross-border transactions. By mid-2023, reports indicated that India had facilitated over $16 billion in rupee-denominated trade settlements, a modest but growing figure that reflects efforts to bypass dollar intermediaries and save on conversion fees.
These moves are part of a broader strategy to bolster the rupee’s global profile. The Reserve Bank of India (RBI) has introduced mechanisms like the Vostro accounts, enabling foreign banks to hold rupees for trade purposes. Such steps aim to enhance the currency’s liquidity and appeal, particularly within the BRICS framework, where discussions on alternative payment systems have gained traction amid geopolitical tensions.
However, the rupee’s path to reserve status faces steep obstacles. Reserve currencies require not just economic might but also open capital accounts, deep financial markets, and widespread trust—attributes the dollar possesses in abundance. India’s capital controls, while necessary for stability, limit the rupee’s convertibility, making it less attractive for global investors seeking seamless access.
Rupee’s Recent Weakness and Market Dynamics
The Indian rupee has experienced persistent pressure against the US dollar, driven by a combination of global and domestic factors. Historical data from the Federal Reserve Economic Data (FRED) shows the exchange rate evolving from around 45 INR per USD in 2010 to over 80 by 2023, reflecting a long-term depreciation trend. This weakening is exacerbated by India’s current account deficit, which stood at 2.1% of GDP in fiscal year 2022-23, as imports—particularly energy and commodities—outpace exports.
Inflation differentials play a role too. With India’s consumer price inflation averaging above 6% in recent years compared to the US Federal Reserve’s 2% target, the rupee’s purchasing power erodes relative to the dollar. Additionally, foreign institutional investor outflows, triggered by rising US interest rates, have depleted reserves and added downward pressure. The RBI’s foreign exchange reserves, which peaked at over $640 billion in 2021, have since moderated, limiting intervention capabilities.
Amid these dynamics, analyst sentiment from sources like Trading Economics, as of August 2025, points to a grim outlook for the rupee, with forecasts suggesting further depreciation if US tariffs on Indian goods materialise. Economists at Bloomberg have labelled the sentiment as bearish, citing potential trade frictions that could widen India’s deficit and strain the currency further.
Implications of US Tariffs and Trade Tensions
Escalating trade tensions, particularly reciprocal tariffs proposed by the US, pose a direct threat to India’s export-driven sectors like information technology and pharmaceuticals. If implemented, such measures could shave off billions from India’s trade surplus with the US, which exceeded $30 billion in 2023. This would intensify pressure on the rupee, potentially leading to a scenario where India loses up to $1 trillion in forex reserves over time, according to some model-based projections from independent analysts.
A table illustrating historical USD/INR trends underscores this vulnerability:
| Year | Average USD/INR Rate | Key Event |
|---|---|---|
| 2010 | 45.73 | Post-GFC Recovery |
| 2015 | 64.15 | Oil Price Slump |
| 2020 | 74.10 | COVID-19 Impact |
| 2023 | 82.50 | Geopolitical Tensions |
These figures, drawn from historical records up to 2023, highlight a consistent devaluation trajectory, with analysts projecting rates could approach 90 INR per USD by end-2025 under adverse scenarios, based on econometric models incorporating trade barriers and interest rate differentials.
Broader Geopolitical Context
The debate over currency dominance extends beyond bilateral US-India relations. Within BRICS, there is growing discourse on de-dollarisation, with members like China and Russia settling trades in yuan and roubles to circumvent sanctions. India, while participating, treads cautiously, balancing its strategic ties with the West. Posts on social media platform X reflect mixed sentiment, with some users highlighting the rupee’s resilience compared to peers like the Turkish lira or Argentine peso, which have depreciated far more sharply.
Yet, credible forecasts from institutions like the IMF suggest the dollar’s share in reserves might decline gradually to 50-55% by 2030, but alternatives like the rupee are unlikely to fill the void without significant reforms. Analyst-led models from Goldman Sachs, as of mid-2025, predict that even optimistic scenarios for rupee internationalisation would see it comprising less than 1% of global reserves by decade’s end.
Investor Implications
For investors, the rupee’s weakness presents both risks and opportunities. Exposure to Indian equities could benefit from a cheaper currency boosting export competitiveness, but currency hedging becomes essential amid volatility. Diversification into dollar assets remains a safe haven, reinforcing the greenback’s allure.
- Hedging Strategies: Utilise forwards or options to mitigate INR depreciation risks.
- Sector Focus: Prioritise rupee-insensitive sectors like domestic consumption over export-reliant ones.
- Long-Term View: Monitor RBI policies for signs of accelerated internationalisation efforts.
In essence, while the Indian rupee’s push for greater global relevance is commendable, its current frailties—amplified by external pressures—underscore the dollar’s unassailable position. Investors would do well to view this dynamic not as a binary contest but as a multifaceted evolution in global finance, where dominance is earned through stability and scale.
References
- Bloomberg. (2025). USD/INR: Currency insights and projections. Retrieved from https://www.bloomberg.com/quote/USDINR:CUR
- Business Standard. (2025). US secy Bessent rules out rupee as reserve currency. Retrieved from https://www.business-standard.com/finance/news/us-secy-bessent-rules-out-rupee-as-reserve-currency-trump-tariffs-125082800427_1.html
- Federal Reserve Economic Data (FRED). (2023). EXINUS exchange rate series. Retrieved from https://fred.stlouisfed.org/series/EXINUS
- Finance Yahoo. (2025). Scott Bessent: Worries about many global issues. Retrieved from https://finance.yahoo.com/news/scott-bessent-worries-lot-things-013116182.html
- FXStreet. (2025). USD/INR steadies as soft dollar offsets US tariff pressure. Retrieved from https://www.fxstreet.com/news/usd-inr-steadies-as-soft-us-dollar-offsets-us-tariffs-impact-on-indian-rupee-202508280602
- India Today. (2025). US Treasury Secretary Scott Bessant mocks Indian rupee. Retrieved from https://www.indiatoday.in/world/us-news/story/us-treasury-secretary-scott-bessant-mocks-indian-rupee-against-dollar-reserve-currency-donald-trump-reciprocal-tariff-2778748-2025-08-29
- Investing.com. (2025). USD/INR currency data and charts. Retrieved from https://in.investing.com/currencies/usd-inr
- Mitrade. (2025). Live market news and data. Retrieved from https://www.mitrade.com/insights/news/live-news/article-1-1074927-20250828
- Moneycontrol. (2025). Not worried about Indian rupee. Retrieved from https://moneycontrol.com/world/not-worried-about-indian-rupee-us-treasury-secretary-mocks-it-as-being-at-all-time-low-article-13494673.html/amp
- Trading Economics. (2025). Indian rupee forecasts and sentiment. Retrieved from https://tradingeconomics.com/india/currency
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- Gulte. (2025). Indian rupee hits record low. Retrieved from https://www.gulte.com/trends/369015/indian-rupee-hits-record-low-against-us-dollar
- CNBC Markets. (2025). INR= Real-Time Data. Retrieved from https://www.cnbc.com/quotes/INR=
- Appreciate Wealth. (2025). Why Indian rupee is falling against US dollar. Retrieved from https://appreciatewealth.com/blog/usd-vs-inr-why-indian-rupee-falling-against-us-dollar
