Global payments
Posted on Mar 13, 2025
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We have heard the news that the USD to INR exchange rate is 87.25, 17 % more than it
was in 2021. Before we explore the factors driving these fluctuations, let's take a moment to
understand the concept of exchange rates. This foundation will help us appreciate the
dynamics at play.
The exchange rate between two currencies indicates how much one currency can be bought for a
unit of another currency.
For example, if the current exchange rate from USD to INR is 87.25, you need to pay 87.25 INR
to buy 1 USD. You can also flip the equation: an INR to USD rate of 0.0114 indicates that you
will need 0.0114 USD to purchase 1 Indian rupee. The exchange rate typically varies every minute.
In November 2024, the USD to INR exchange rate was 82. Today, the USD to INR exchange
rate is 87.25.
If you are a freelancer or service exporter the exchange rate significantly influences your
earnings, making it essential to understand for maximising your potential revenue!
If a freelancer is providing a service valued at $1,000, the earnings would be as follows:
Using the USD to INR conversion rate from November 2024, the freelancer would earn 82,000.₹
However, with the current USD to INR exchange rate, the same service would yield 87,250.₹This results in a difference of ~7% in net earnings.
What drives the USD to INR exchange rate?
Essentially, the USD to INR exchange rate is driven by the demand for one currency compared
to another. To understand the factors affecting the USD to INR exchange rate, we need to
examine what influences the demand for USD over INR.
If the USD to INR exchange rate is increasing, it indicates that the demand for USD is rising
compared to demand for INR.
On the other hand if USD to INR exchange rate is going down it means, demand for INR is
higher compared to demand for the USD.
What are the factors that impact the exchange rate?
Interest Rates and Inflation
Interest rates and inflation are linked to each other, and both have a significant impact on the
USD to INR exchange rate.
What is Inflation?
Inflation means the change in the price of the same goods over a period of time. For example, a
McDonald's Aloo Tikki costs 45 today, while it was priced at 20 back in 2016. If the ₹₹ ingredients remain the same, the increase of 25 over nine years indicates that the cost of those ₹
ingredients has gone up.
Consider this: if we could buy 1 kg of potatoes for 8 in 2016, but today it costs 9, this shows ₹₹
that the price of potatoes is increasing.
While some increase in prices can be normal, rapid changes in prices (and consequently
inflation) can become problematic for a nation, as they can make goods and services less
affordable for consumers.
To make sure that inflation is under control or it is not volatile the Reserve Bank of India (RBI)
adjusts interest rates.
What is an Interest Rate?
Interest rate is basically rate at which Reserve bank of India lends money to banks. Interest
rates have negative impact on inflation. To negate rising inflation, RBI increases interest rates.
Essentially, RBI lends to banks at a higher rate. Also, consumerss can earn higher interest
by putting money in a bank. This, in turn, controls consumption, leading to less demand
and hence lower inflation. On the other hand, to promote growth RBI cuts interest rates. Now bank gets money at a cheaper rate from RBI. It means corporates can gate money at a cheaper rate, which will promote more production and hence higher supply. Also, now people demand of goods also increases therefore increase in inflation.
How interest rates affect USD to INR exchange rate?
Higher interest rates attract more foreign investment, creating a favourable investment
opportunity. This leads to the appreciation of the INR, meaning that the USD to INR exchange
rate decreases.
Current Account Deficits
Current account deficits, is basically balance of trade between two trading countries. In simple
words, how much a country exports goods or service - value of goods and services imported.
A deficit means, country is spending more on foreign trade (more imports) compared to what it
is earning by exporting. To make the payments it needs to borrow foreign currency. In simpler
words, country requires more foreign currency than what it receives through sale of exports.
The higher demand for foreign currency lowers the country's exchange rate.
Government Debt
Government invests on infrastructures. Sometime to finance infrastructures project government
needs to borrow money from markets and foreign investors. Large public debts are not favourable for foreign investors. Because large debts, increases inflation and higher inflation in longer terms means net yield for investments going down.
In the worst case, government can print more currencies to pay for debts. But increasing money
supply increases inflation. Which also have negative impact on exchange rates.
Also, if country comes across as unable to pay for debts it's also a negative signal for large
foreign investors. This will lower foreign inflows to the country. Hence less demand for local
currency. Hence depreciating local currency over trading currency.
Is USD to INR exchange rate fluctuation affecting your business?
For large corporations like Indigo Airlines, fluctuations in exchange rates can impact profit
margins. Indigo purchases oil for its operations, and payments for oil are always made in USD.
Meanwhile, the majority of Indigo's revenue is generated in INR. Changes in the exchange rate
can affect both sides of the business. To manage this foreign exchange risk, Indigo has a global
treasury team that implements hedging strategies and oversees currency exposure.
Small and medium-sized exporters do not have this luxury. What they can do is hedge against
currency fluctuations, diversify their markets, adjust prices to account for currency changes, and
monitor the markets at regular intervals.
Exporting services from India? Choose Infinity for your international payments.
Infinity can help you with opening up a local currency bank account. Like USD account for your
US based customers. Benefit of that is your client can make payment locally. What you gets it you move them back to India cheaply, compliantly and on time !
