The rupee hit an all-time low against the US dollar on Thursday, falling below the Rs 85 mark for the first time. This drop follows the US Federal Reserve’s decision to cut key interest rates by 25 basis points and signal fewer rate cuts in 2025, adding pressure to the currency already strained by weak capital inflows and economic challenges.
The rupee dropped to 85.0650 against the US dollar in early trade, compared to 84.9525 on Wednesday. The pace of depreciation has sped up, with the fall from Rs 84 to Rs 85 occurring in just two months. In comparison, the rupee took 14 months to slide from Rs 83 to Rs 84, and 10 months to weaken from Rs 82 to Rs 83.
The rupee’s decline is part of a broader trend, as other Asian currencies also weakened on Thursday. The Korean won, Malaysian ringgit, and Indonesian rupiah fell by 0.8%-1.2%. The sell-off followed the Federal Reserve’s latest policy guidance, with the Fed’s “dot plot” now forecasting just two rate cuts in 2025, half of what was previously expected in September.
Federal Reserve Chair Jerome Powell’s comments further added to the market’s caution. He said, “From here, it’s a new phase, and we’re going to be cautious about further cuts.”
WHAT’S DRIVING THE FALL
The rupee’s weakening is attributed to a mix of global and domestic factors. India’s economic growth slowed to a seven-quarter low in the July-September period, and the merchandise trade deficit has been widening, with capital inflows remaining subdued. Additionally, persistent strength in the US dollar has worsened the rupee’s position. Expectations of strong US economic policies have kept the dollar resilient, and the Fed’s latest guidance is likely to further bolster its value.
India’s slowing economic growth has fueled speculation that the Reserve Bank of India (RBI) may need to cut rates soon, adding further downward pressure on the rupee. Akshay Kumar, Head of Global Markets at BNP Paribas India, stated, “In the short term, we can expect upward pressure on USD/INR to remain.” The challenging environment has led investors to raise their short positions on the rupee to a two-year high, according to a recent Reuters poll. The rupee has already weakened by 2% this year, placing it in the middle of the performance range among Asian currencies.
Despite routine interventions by the Reserve Bank of India to stabilize the currency, analysts believe that the rupee’s relatively muted volatility in recent years may not persist in 2025.