The rupee has been losing ground rapidly against the greenback in recent times, much to the dismay of all. But while the Indian currency is down close to 8 per cent against the dollar since last Diwali in 2014, it has gained almost 9 per cent against the euro and 6 per cent against the Japanese yen in the same period.

In fact, in the early part of 2015, the Reserve Bank of India had a tough time keeping the rupee from appreciating too much. The currency had been a beneficiary of falling crude prices, improving current account deficit and falling inflation. But despite the fundamental strength in the rupee, it has been weaker against the dollar that has been racing higher on hopes of a Fed rate hike. This relative weakness of rupee against the dollar has been hurting our economy due to the predominance of the dollar in our external transactions. Latest data on external debt shows that 58 per cent of the country’s borrowing is denominated in US dollar. The share of dollar denominated debt has increased close to 5 percentage points since the end of 2010. Loans in yen account for a meagre 4 per cent of the country’s borrowing and euro loans have an even smaller share at just 2.4 per cent. If we consider currency-wise invoicing of external trade, the numbers are even worse. Latest data available from the RBI shows that more than 80 per cent of the invoicing for the country’s imports and exports is done in US dollars.

There is no doubt that the country needs to increase non-dollar invoicing in external trade and shift borrowings to currencies other than the dollar, preferably the rupee. Policy-makers are aware of this need and the share of debt denominated in rupee is up from 19 per cent towards the end of 2010 to 27 per cent now. Moving away from dollar to rupee denominated transactions not only helps dealing with currency risk but also takes the country one step further towards internationalising the currency.

Senior Deputy Editor & Head of Research

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