The relentless fall of the rupee against the dollar is mounting financial pressure on corporate India, particularly for firms reliant on foreign currency debt. With the currency having depreciated over 5% in the past year—plunging to a record low of 88.10 against the dollar—businesses are finding themselves squeezed by rising debt-servicing costs. The backdrop of global trade tensions and economic uncertainty only compounds these difficulties, leaving Indian companies navigating a perilous landscape of higher borrowing costs, currency volatility, and mounting external obligations.
Companies that have failed to hedge their foreign debt are facing mounting financial pressures. A depreciation of the rupee increases the rupee-equivalent repayment cost for businesses relying on external commercial borrowings (ECBs) by the same percentage. For instance, a company with $500 million in ECBs would see an additional burden of Rs 2,500 crore if the rupee weakens by 5%. With US interest rates rising and the rupee depreciating, Indian firms now require significantly more rupees to service their foreign currency loans, making these loans both more expensive and less attractive.
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Over the past five years, the rupee has declined by over 22.36%, from 71.51 per dollar to its current level. This depreciation directly translates into a corresponding increase in the debt-servicing burden for companies.
Expanding ECB market and unhedged risks
According to the Reserve Bank of India, in 2023-24, there were 1,221 ECB registrations valued at $49.2 billion, compared to 1,102 registrations worth $26.62 billion in the previous year. While a majority of these borrowings were hedged, nearly 30% of them—those denominated in rupees—remain exposed to currency fluctuations. Companies with unhedged foreign currency loans will face rising costs, making such borrowings significantly more expensive than domestic rupee-denominated debt. Additionally, with the US Federal Reserve unlikely to cut interest rates in the near future, higher global borrowing costs will continue to weigh on Indian businesses.
If this trend persists, companies struggling with increased foreign debt and declining profitability may be forced to cut back on investments, potentially hindering broader economic growth.
Beyond corporate debt, a weaker rupee also fuels inflation by making imports more expensive. As a result, the prices of goods and services rise, placing additional pressure on an economy already facing sluggish consumer spending. Industries that rely heavily on imports—such as oil and gas, electronics, and pharmaceuticals—are facing significant cost pressures due to the rupee’s sharp depreciation. Although many companies hedge short-term liabilities (1-3 months), the rising cost of imports is squeezing profit margins and contributing to broader inflationary trends.
Silver lining for exporters
While a depreciating rupee hurts importers, exporters have remained relatively resilient, benefiting from higher rupee-denominated revenues. A weaker rupee enhances India’s export competitiveness by making goods and services cheaper in global markets. Key export-driven sectors such as IT, pharmaceuticals, textiles, and automobiles tend to gain from this currency movement. Additionally, as the forward premium has dropped from 4.5% to 2.5% due to a narrowing interest rate differential, many exporters have reduced their hedge ratios to capitalise on the favourable exchange rate.
However, industries that rely on imported raw materials—such as electronics and manufacturing—face shrinking profit margins. The cost pressures they experience may ultimately be passed on to consumers, further fuelling inflation.
RBI’s stance on rupee volatility
The Reserve Bank of India’s approach to managing the rupee’s depreciation has been measured. There are indications that the central bank may not be averse to a gradual decline in the currency, aligning with global trends. RBI Governor Sanjay Malhotra recently stated that the central bank’s interventions in the forex market will aim to smooth out excessive volatility rather than target specific exchange rate levels. However, with limited intervention tools available, the RBI has already sold dollars in both the spot and forward markets to curb volatility. As a result, India’s foreign exchange reserves have declined by $51.52 billion, from $682.13 billion on November 1, 2024, to $630.61 billion as of February 1, 2025.
Indian companies are adopting multiple strategies to mitigate the impact of a volatile rupee. Importers are increasing their hedging activities despite the added cost, as a protective measure against forex losses. Some firms are also shifting towards domestic financing to reduce their exposure to foreign currencies. Additionally, businesses are adjusting their pricing strategies to pass on higher costs to consumers where feasible. More sophisticated hedging tools, such as options contracts, are also being explored to supplement traditional forward contracts. In sectors where price increases are difficult to implement, companies are focusing on cost-cutting and operational efficiency improvements.
Future of foreign debt
India’s external debt remains a silent storm, with the private sector accounting for nearly half of the total burden. Given the renewed volatility in the USD/INR exchange rate, analysts predict that corporate India will scale back overseas debt issuance in 2025 due to rising repayment costs and higher forward cover prices. According to financial consultant Prabal Banerjee, who advises leading corporations, Indian firms are expected to limit their foreign borrowings significantly in the coming year.
Furthermore, the trajectory of US economic policies under Donald Trump’s administration will play a crucial role in shaping corporate decisions on overseas fundraising. Uncertainty surrounding US monetary policy, trade relations, and interest rate movements will weigh heavily on companies considering foreign loans.
The rupee’s depreciation poses a dual challenge for Indian corporates—rising foreign debt servicing costs for companies with foreign currency loans and inflationary pressures for those reliant on imports. While exporters may gain from a weaker rupee, industries with high import dependencies face an uphill battle. The RBI’s policy stance suggests that while extreme volatility will be managed, a gradual depreciation of the rupee is not off the table. As a result, Indian companies must adopt more proactive financial strategies to navigate the currency’s fluctuations and ensure long-term sustainability.