The Indian rupee breached the 85-mark against the U.S. dollar for the first time on Thursday, hitting a record low as the Federal Reserve’s hawkish outlook signaled fewer rate cuts in 2025. The rupee, already under pressure from sluggish capital flows and a widening trade deficit, weakened to 85.0650, compared to Wednesday’s close of 84.9525.
The drop marks a sharp depreciation trajectory for the rupee. It has taken just two months for the currency to fall from 84 to 85, a much faster pace than prior similar declines. By comparison, the rupee took 14 months to weaken from 83 to 84 and 10 months to drop from 82 to 83.
Impact of Fed Policy on Rupee and Asian Peers
The Fed’s updated “dot plot” projections, signaling only two rate cuts next year—half the number expected in September—triggered a selloff across Asian currencies. Fed Chair Jerome Powell struck a cautious tone, stating, “From here, it’s a new phase, and we’re going to be cautious about further cuts.”
Other Asian currencies also fell sharply on Thursday, with the Korean won, Malaysian ringgit, and Indonesian rupiah declining between 0.8% and 1.2%.
The rupee’s slide underscores its vulnerability to external shocks, particularly the persistent strength of the U.S. dollar, which has gained momentum on optimism surrounding incoming U.S. President Donald Trump’s expected policies. Analysts say the Fed’s revised outlook will only provide further support for the greenback.
India’s Domestic Economic Challenges
In addition to external pressures, the rupee is grappling with domestic headwinds. India’s economic growth slowed to a seven-quarter low in the July-September period, while the merchandise trade deficit continues to widen. Capital inflows have also been tepid, exacerbating the currency’s struggles.
The weak economic backdrop has prompted investors to increase their short positions on the rupee to a two-year high, according to a recent Reuters poll. The currency has depreciated about 2% so far this year, placing it mid-pack among Asian peers.
Reserve Bank of India Interventions and Outlook
Despite the rupee’s sustained depreciation, routine interventions by the Reserve Bank of India (RBI) have helped limit its volatility compared to other Asian currencies. However, analysts warn that the muted volatility seen in recent years may not extend into 2025, as global and domestic challenges mount.
The rupee’s new low comes at a time of heightened uncertainty, with analysts forecasting increased fluctuations in the currency amid shifting global monetary policies and domestic economic pressures.