Rupee fell to an all-time low against the US dollar on Thursday, breaching the Rs 85 mark for the first time.
This decline comes after the US Federal Reserve cut key interest rates by 25 bps and signalled fewer rate cuts in 2025, putting additional strain on the currency, which has already been under pressure due to weak capital inflows and other economic challenges.
The rupee dropped to 85.0650 against the US dollar in early trade, compared to 84.9525 on Wednesday. The pace of the rupee’s depreciation has accelerated recently, with the fall from Rs 84 to Rs 85 taking just two months. In contrast, the slide from Rs 83 to Rs 84 took 14 months, and it took 10 months for the rupee to weaken from Rs 82 to Rs 83.
The rupee’s decline is not an isolated event, as other Asian currencies also weakened on Thursday. The Korean won, Malaysian ringgit, and Indonesian rupiah all fell by 0.8%-1.2% during the day.
The sell-off in Asian currencies followed the Federal Reserve’s latest policy guidance. The Fed’s “dot plot,” which outlines its rate expectations, now projects only two rate cuts in 2025, half of what was previously signalled 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.”
The rupee’s weakening has been driven by a combination of global and domestic factors. India’s economic growth slowed to a seven-quarter low in the July-September period, while the merchandise trade deficit has been widening. Capital inflows into the country have also remained subdued.
Persistent strength in the US dollar has added to the rupee’s troubles. Expectations of robust US economic policies have kept the dollar strong, and the Fed’s latest guidance is expected to further boost the greenback’s value.
India’s slowing economic growth has also led to speculation that the Reserve Bank of India (RBI) may need to cut rates soon, adding to downward pressure on the rupee. Akshay Kumar, Head of Global Markets at BNP Paribas India, noted, “In the short term, we can expect upward pressure on USD/INR to remain.”
The challenging environment for the rupee has prompted investors to raise their short positions on the currency to a two-year high, according to a recent Reuters poll. The rupee has already weakened by 2% so far this year, placing it in the middle of the performance pack among Asian currencies.
Despite routine interventions by the Reserve Bank of India to stabilise the currency, analysts believe the rupee’s muted volatility of recent years may not continue in 2025.