The Indian rupee declined past 85 to the U.S. dollar for the first time on Thursday after the Federal Reserve signalled fewer rate cuts next year, piling more pressure on a currency already struggling with tepid capital flows.
The rupee hit a low of 85.0675 against the U.S. dollar, down from 84.9525 on Wednesday. The pace of the currency’s fall to the 85 handle from 84 has been faster than prior declines of the same magnitude.
The rupee’s drop to 85 from 84 has taken place in about two months, while the decline to 84 from 83 took nearly 14 months. It took the currency 10 months to decline to 83 from 82.
ASIA FX SLUMPS
The rupee’s Asian peers – the Korean won, the Malaysian ringgit, and the Indonesian rupiah – were down 0.8%-1.2% on the day.
The selloff in Asia FX comes after the Fed dot plot indicated two rate cuts next year, half of what was signalled in September.
“From here, it’s a new phase and we’re going to be cautious about further cuts,” Fed Chair Jerome Powell said.
The Fed’s hawkish outlook on interest rates also put emerging market central banks on guard against currency volatility.
The Reserve Bank of India intervened to support the rupee, Thailand’s central bank said it will ensure that the baht is not too volatile while Indonesia’s central bank said it is monitoring the situation and will undertake measures and timely currency stabilisation efforts.
PERSISTENT HEADWINDS
The Fed’s hawkish turn comes at a time when the rupee has been facing several pressures. India’s economic growth slowed to a seven-quarter low in July-September, the merchandise trade deficit is widening, and capital inflows are tepid.
Persistent strength in the U.S. dollar due to incoming U.S. President Donald Trump’s expected policies has further undermined the rupee. The Fed’s latest rate forecasts will provide an additional fillip to the dollar.
India’s sharply slowing growth, necessitating the central bank to deliver rate cuts sooner rather than later, is an added factor that is weighing on the rupee, said Akshay Kumar, head of global markets at BNP Paribas India.
“In the short term, we can expect upward pressure on USD/INR to remain,” he said.
Investors raised their short positions on the rupee to a two-year high in December, according to a Reuters poll.
The rupee has weakened about 2% so far this year, and is in the middle of the Asia FX pack.
Routine interventions by the central bank have kept the rupee’s volatility low relative to its Asian peers.
The muted volatility the rupee enjoyed in the last two years may not be repeated in 2025, analysts said.
Source : Reuters
