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ARTICLE AD BOX
Summary
The economy is structurally exposed to currency risk for no fault of its own by a global phenomenon—dollar dominance. The international macro-economic concept of 'original sin' coined by Barry Eichengreen and Ricardo Hausmann explains how this puts the currency in a spot.
In the past few weeks, the rupee’s slide and the expectation that it would breach the psychological 100-to-the-dollar mark has triggered familiar anxieties, reviving memories of the 2013 ‘taper tantrum’ when India’s currency lost almost a fifth of its value and hit a then-record low of 68.85.
Depending on which side of the ideological spectrum one leans toward, the reactions have been sharply divided, ranging from doomsday predictions to confident assertions that a weaker currency is perfectly acceptable, even beneficial, in such times.
The usual explanations—rising oil prices, a widening trade deficit, higher US interest rates and geopolitical tensions in West Asia—have all made their rounds, and all of these are valid.
India would do well to avoid both panic and denial, because these narratives merely describe what is happening. They are surface-level explanations. For a structural explanation, we must extend our discussion to the phenomenon of an ‘original sin’ in international macro-economics.
Coined by economists Barry Eichengreen and Ricardo Hausmann, the ‘original sin’ hypothesis describes a structural problem faced by emerging markets like India, which cannot easily borrow abroad in their own currency; nor can they invoice most of their international trade in rupees.
Because global investors demand protection from exchange rate fluctuations, these economies are forced to denominate their international liabilities in a dominant foreign currency—the US dollar.
Thus, even when an economy has robust domestic growth, sound fiscal policies and stable inflation, as India has had, it remains structurally tied to the financial architecture of the Global North.
This bout of rupee depreciation is a textbook demonstration of how this ‘original sin’ works in practice. Over the past decade, Indian corporations have increasingly turned to external commercial borrowings (ECBs) to fund infrastructure projects, technology expansion and large capital expenditure plans.
Overseas borrowing was significantly cheaper than domestic credit. By September 2024, India’s outstanding ECB stock had risen to about $190 billion, with nearly $155 billion comprising non-rupee and non-foreign direct investment liabilities. Borrowing costs had steadily softened, with the average cost of ECBs falling to around 6.6% during April–November 2024 and easing further to 5.8% before the year’s end.
Unsurprisingly, companies continued to tap overseas markets aggressively, with ECB flows remaining strong into 2026. But beneath low interest rates lay a structural trap. Indian firms earn largely in rupees while servicing such loans in dollars. So a falling rupee raises the real burden of repayment, creating a ‘currency mismatch’—a vulnerability that often stays hidden until the exchange rate turns volatile.
Further, the so-called ‘sin’ breeds a secondary macroeconomic phenomenon, the ‘fear of floating.’ In theory, a central bank should let its currency float freely, allowing depreciation to act as a natural economic shock absorber that boosts export competitiveness.
But the Reserve Bank of India (RBI) knows that a crash of the rupee would wreck corporate balance sheets with large dollar liabilities, make imports costlier and impact portfolio flows, among various reasons to intervene in favour of its stability.
To smooth volatility, RBI must use its foreign exchange reserves. This involves a frustrating trade-off: dollar-selling reduces the policy space RBI has to focus purely on domestic credit costs and GDP growth. The rupee’s slide, thus, is the price India pays for operating in a global system that rests on the US greenback.
A weaker rupee should not be treated as a psychological wound to national pride, but as a structural wake-up call. Attempts to protect the rupee solely through RBI intervention or rhetorical appeals to patriotism are temporary and expensive responses. Policymakers must instead focus on gradually overcoming its ‘original sin.’
First, policymakers must try to internationalize the rupee. Bilateral local-currency trade pacts could help, but these must be scaled beyond diplomatic symbolism to commerce success. Settling oil and other imports in rupees, or through non-dollar payment channels, would reduce systemic vulnerability to external shocks.
Second, the government must deepen and incentivize the offshore rupee-denominated market for ‘masala bonds.’ Shifting the exchange-rate risk from Indian borrowers to foreign investors could help fund our massive infrastructure needs without exposing our corporate sector to currency mismatch. To participate in India’s growth story, global investors must accept the currency risk that comes with investing in the country.
Finally, this crisis highlights the urgency of aggressive import substitution in critical dollar-heavy sectors. Investments in electric mobility, green hydrogen, renewable energy and solar manufacturing are not just environmental priorities but also macro security imperatives.
As long as India remains tethered to dollar-denominated liabilities, its economic destiny will remain partially hostage to the whims of the US Federal Reserve and global geopolitical fractures. The current slide of the rupee is an uncomfortable reminder of the Indian economy’s ‘original sin.’ The only meaningful long-term response is to gradually move away from the dollar trap, which would ensure that India’s future growth is increasingly funded, invoiced and secured in its own currency.
These are the author’s personal views.
The author is professor, economics and executive director, Centre for Family Business & Entrepreneurship at Bhavan’s SPJIMR.
About the Author
Tulsi Jayakumar
Tulsi Jayakumar is a faculty member, researcher, and writer whose work sits at the intersection of economics, family business, and strategy. With over three decades of experience in management education, she teaches microeconomics, macroeconomics and behavioural economics while working closely with business families across India on issues of governance, succession, and professionalisation.<br><br>Her work applies an economic lens to real-world business contexts—examining how incentives, market structures, and institutional frameworks shape firm behaviour, particularly in family-owned enterprises that dominate large parts of the Indian economy. She also writes on macroeconomic trends and policy shifts, interpreting their implications for firms, industries, and entrepreneurial decision-making. She has authored multiple teaching cases published with leading global repositories, and her writing spans academic journals and practitioner-focused platforms.<br><br>For Mint’s readers, she writes at the intersection of markets, management, and policy—translating economic ideas into insights on competition, strategy, and decision-making in contemporary India, from platform businesses to legacy family firms navigating disruption and governance challenges. She enjoys turning complex business dilemmas into accessible narratives, both for the expert and the layperson. Outside her professional work, she enjoys travelling, reading and cooking—not necessarily in that order.
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