Indian rupee breaches 85 to hit lifetime low against USD
What's the story
The Indian rupee has seen a sharp depreciation, hitting an all-time low of 85 against the US dollar today. The fall comes on the back of a combination of global and domestic factors that have weighed down the currency. The US Federal Reserve's recent policy decisions have been a major contributor to the downward trend.
Policy impact
US Federal Reserve's policy decisions impact rupee
The US Federal Reserve's aggressive position at its December meeting has rattled global markets, including the Sensex and Nifty. The Fed now expects just two rate cuts in 2025, down from the four expected in September. It also raised its core PCE inflation forecast to 2.8% in 2024 and 2.5% in 2025, underscoring persistent inflation concerns.
Economic pressure
dollar strength and trade deficit pressure rupee
The dollar index has climbed to a two-year high, putting more pressure on emerging market currencies such as the rupee. Morgan Stanley revised its outlook, now predicting just two Fed rate cuts next year instead of three, due to a cautious approach amid high inflation. Meanwhile, India's merchandise trade deficit surged to $37.84 billion in November from $27.14 billion in October, further straining the rupee.
Market intervention
RBI's efforts and global risk sentiments
The RBI has been actively intervening in forex markets to mitigate the rupee's depreciation. However, the rate of decline reflects global challenges and limited domestic buffers. "The RBI will have its hands full ensuring a measured pace of rupee devaluation while balancing inflation risks," a currency trader told CNBC-TV18.
Policy effects
Trump's policies and India's economic slowdown
Markets brace for possible trade and fiscal policy changes under US President-elect Donald Trump. His policies are viewed as a risk for emerging market currencies like rupee. Trade policy changes could upset global exports, while aggressive fiscal measures could further strengthen dollar. Meanwhile, India's economic slowdown has curtailed capital inflows with foreign investors likely to remain net sellers of Indian equities this quarter, dampening rupee demand.