The Indian rupee fell to an all-time low on Thursday, breaching the Rs 85 mark against the US dollar for the first time in history. The currency weakened to 85.0650 in early trade, compared to 84.9525 on Wednesday, marking a significant milestone in its downward trajectory.
This sharp decline follows the US Federal Reserve’s decision to cut key interest rates by 25 basis points while signaling fewer rate cuts in 2025. These developments, coupled with weak capital inflows and domestic economic challenges, have intensified the pressure on the rupee.
The Accelerating Decline
The pace of the rupee’s depreciation has been notably swift in recent months.
- The fall from Rs 84 to Rs 85 occurred in just two months.
- In contrast, it took 14 months to slide from Rs 83 to Rs 84 and 10 months to weaken from Rs 82 to Rs 83.
This accelerated weakening reflects both domestic vulnerabilities and global monetary policy shifts.
The rupee’s decline is part of a broader trend among Asian currencies. On Thursday, the Korean won, Malaysian ringgit, and Indonesian rupiah all fell by 0.8 percent-1.2 percent, driven by the Federal Reserve’s updated rate guidance.
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The Fed’s “dot plot,” which now projects only two rate cuts in 2025 (down from four signaled in September), has bolstered the US dollar and added to the sell-off in regional currencies. Federal Reserve Chair Jerome Powell’s cautious remarks further reinforced market apprehensions.
“From here, it’s a new phase, and we’re going to be cautious about further cuts,” Powell stated, signaling sustained strength for the greenback.
What’s Driving the Rupee’s Decline?
The rupee’s depreciation stems from a combination of global and domestic factors:
Weak Economic Indicators
India’s economic growth slowed to a seven-quarter low in the July-September period. The merchandise trade deficit has been widening, indicating weaker external stability.
Capital Outflows
Subdued foreign capital inflows have strained the rupee, with speculative investors increasing their short positions on the currency to a two-year high, according to a Reuters poll.
US Dollar Strength
Expectations of robust US economic policies and the Fed’s restrained rate-cut projections have strengthened the dollar, creating headwinds for the rupee.
RBI Interventions
While the Reserve Bank of India (RBI) has routinely intervened to stabilize the currency, analysts warn that the rupee’s muted volatility seen in recent years may not persist into 2025.
The rupee’s historic low against the dollar underscores growing concerns about India’s macroeconomic stability amid global headwinds. With the Reserve Bank of India expected to deliberate rate cuts to support growth, the currency may face further downward pressure in the months ahead.
