Foreign Orders, Local Risk: Why Currency Volatility Is the Silent Threat to Indian SMEs

In recent months, Indian SMEs engaging in export and import have found themselves navigating choppy currency waters. Geopolitical shifts, global trade dynamics, and central bank interventions have combined to shape a complex foreign exchange landscape, one that demands informed risk awareness and strategic financial management.

Geopolitical Flashpoints: When Tension Becomes Volatility

The Indian Rupee (INR) has shown significant sensitivity to geopolitical developments. For instance, during the early May 2025 cross-border alterations dubbed “Operation Sindoor”, where India carried out military operations in Pakistan, the rupee depreciated 57 paise in a single day, closing at ₹84.79 to the US Dollar (USD). Within days, it recorded its worst single-day performance in over two years, weakening nearly 1.5% to ₹86.08 per USD, triggered by escalating tensions and investor jitters.

Similarly, renewed uncertainties from US – China trade friction have also echoed through Indian markets. In early June 2025, such volatility pushed the INR down to ₹85.90 per USD amid “risk-off” sentiment and foreign institutional investor (FII) outflows.

For SMEs, these single‑day swings translate into unpredictable revenue streams, squeezed margins and urgent worries over already-agreed foreign currency deals. A 1% shift in currency could turn a modest win into a significant loss.

Global Trade Moves: Negotiations That Move Markets

Conversely, even prospective trade pacts have lifted sentiment. On June 6, it was reported that negotiations between India and the US were extended, with hopes for an interim trade deal by July 9 to ease reciprocal tariffs. Confidence around this development, along with a potential India – UK deal, has sparked optimism in financial markets.

Bank of America also predicts that the INR could strengthen toward ₹84 per USD by end‑2025 once trade agreements take shape and crude oil remains soft. For SMEs awaiting such outcomes, this means the rub could turn both ways – stronger INR, but tighter margins.

RBI’s Policy Measures: Calming the Storm

To mitigate excessive INR swings, the Reserve Bank of India (RBI) has adopted several key measures:

• Repo Rate Cuts & Liquidity Infusion: The RBI’s recent 50 bps RBI Repo rate cut, paired with a phased reduction in the cash reserve ratio, injected ₹2.5 trillion into the banking system. Domestic bond yields softened and the INR welcomed inflows. Indeed, the INR traded around ₹85.63 per dollar following these moves.

• Volatility Management: RBI Governor Sanjay Malhotra clarified that RBI will not peg the INR at a particular level but will focus on dampening excessive volatility via calibrated forex market interventions. This marks a shift toward subtle, cautious participation rather than aggressive currency control.

• Monitoring Regional Dynamics: RBI continues tracking neighbouring currency moves, especially the Chinese Yuan (CNY). A weakening CNY, due to US tariffs affecting China, could induce downward pressure on the INR. RBI, while allowing some market-driven depreciation, remains alert to such ripple effects.

These actions have helped hold back extreme currency swings, but as RBI notes, volatility still emerges with global shocks.

Currency Risk in Practice: Real Impacts on SMEs

Currency moves of this magnitude hold significant consequences for export‑oriented SMEs:

• Reduced Export Revenues
  Uncertainty over higher tariffs imposed by USA on goods exported to USA by India has reduced the exports from India to USA, thereby reducing the export revenues considerably.

• Increased Import Costs
  For SMEs that rely on imported inputs – machinery parts, raw materials, chemicals – a depreciating INR directly inflates cost of goods sold, squeezing margins unless prices can be passed on.

• Balance Sheet Vulnerabilities
  Unhedged foreign currency loans or receivables can distort financial planning and complicate forecasting and working capital management.

A study by the Indian Institute of Banking & Finance (IIBF) concluded that SMEs are particularly vulnerable to sudden currency swings, given their weaker operational hedging capabilities.

How an Ideal Banking Partner Can Help

While macro-level interventions by the RBI provide a buffer, SMEs need operational tools and a supportive banking partner to navigate currency risk proactively:

• Tailored Hedging Instruments:
  Banks should provide accessible, SME-focused derivatives such as forward contracts, currency options and cross-currency swaps. In March 2025, many domestic firms began increasing long‑tenor hedges due to declining protection costs.

• Structured Guidance & Education:
  Many SMEs lack awareness of forex tools. Banks can host educational webinars, offer scenario analyses, and develop structured treasury risk policies tailored to SME volumes.

• Integrated Treasury Platforms:
  Modern digital platforms enabling real-time tracking of exposures, automated hedge execution and intuitive dashboards can demystify currencies for SME leaders.

• Natural Hedging Solutions:
  Offering multi-currency accounts [like Exchange Earners’ Foreign Currency (EEFC) Account] and facilitating matched invoicing in INR while backing foreign receipts, can manage risk without derivatives.

• Proactive Advisory:
  Banks can play an advisory role by flagging impending geopolitical triggers, offering forward outlooks on volatility and suggesting pre-emptive hedge strategies.

Policy Outlook & What SMEs Should Watch

• Trade Deal Timelines:
  Keep an eye on India’s international negotiations – especially with the US and UK. A favourable interim trade deal could strengthen the INR; a breakdown could rear volatility.

• Crude Price Movements:
  Given India’s oil import dependency, global crude price trends remain a critical driver of the INR’s path.

• Global Risk Appetite:
  Shifts in US – China tensions, Fed rate signals, and FII flows can upend INR stability, creating windows of opportunity or risk.

Recommendations for SMEs

• Assess Your Currency Exposure:
  Map out every foreign invoice, payment, and contract. Understand where risk lies – transactional (short‑term) or translational (balance sheet).

• Adopt a Hedging Policy:
  Even partial hedging (25 – 50%) reduces volatility without full exposure – stronger than leaving all currency risk unmanaged.

• Choose the Right Banking Partner:
  Look for banks that offer SME-centric forex solutions: platforms, advisory services, and adaptive hedging tools.

• Smart drafting:
  Including contractual provisions like ‘buffer pricing’ or currency adjustment clauses can shift some risk responsibility onto the buyer.

Currency volatility may not be as visible as power outages or raw material shortages, but for SMEs trading internationally, its impact can be just as damaging. Today’s INR seesaws – from conflict with Pakistan to shifts in US – China policy or trade negotiations – can derail carefully planned margins.

Yet help is at hand: RBI’s liquidity support and volatility‑focused easing, combined with SME‑friendly hedging services from banks, can equip exporters and importers to navigate the storm. A proactive banking partner does not just offer tools – it enables financial resilience.

For India’s SMEs – especially those in textiles, pharmaceuticals, auto components and engineering exports – currency risks are neither distant threats nor unavoidable hazards. They are real, measurable, and manageable – with the right strategies, education and bank support in place.