The Indian rupee plunged to a historic low of 85.0775 against the US dollar on December 19, signaling a challenging economic backdrop influenced by global financial dynamics. This depreciation came as the US Federal Reserve indicated fewer rate cuts in 2025, bolstering the dollar and pressuring emerging market currencies like the rupee.
A Steep Slide in Rupee Value
Closing at 85.0775 against the dollar compared to the previous session’s 84.9550, the rupee marked a pivotal milestone by crossing the 85 mark for the first time. Year-to-date, the Indian currency has weakened by 2.20% against the greenback. Despite this, the rupee remains one of the least volatile currencies among its global peers, underscoring its relative resilience.
The Fed’s Policy and Its Ripple Effects
The Federal Reserve’s decision to reduce its key interest rate by 25 basis points reflects a cautious approach to economic stabilization. With the Federal Open Market Committee setting the borrowing rate to a target range of 4.25%-4.5%, the central bank also hinted at two additional rate cuts in 2025. This nuanced stance on monetary policy led to a surge in the dollar index, which climbed to 108.086, its highest level since November 2022.
Key Drivers of Rupee Depreciation
Multiple factors contributed to the rupee’s decline:
- Dollar Strength: A hawkish outlook from the Fed has bolstered the US dollar, pushing down emerging market currencies.
- Capital Outflows: Foreign portfolio outflows from Indian equities have increased downward pressure on the rupee.
- Asian Currency Weakness: A broader depreciation of Asian currencies, particularly the Chinese yuan, has compounded the rupee’s struggles.
- Market Uncertainty: Political uncertainties, trade policies, and looming inflationary pressures add complexity to currency markets.
Impact on India’s Forex Reserves
The Reserve Bank of India (RBI) has been actively intervening in currency markets, but this has led to a significant depletion of foreign exchange reserves. Forex reserves fell by $46 billion between October and December, shrinking to $654.857 billion as of December 6. This decline raises concerns about the sustainability of interventions in the face of persistent downward pressures on the rupee.
Economic Implications and Outlook
The rupee’s depreciation has broader implications for India’s economy, particularly in terms of import costs and inflationary pressures. Kunal Sodhani, Vice President at Shinhan Bank, highlighted the challenges posed by geopolitical tensions, tariff policies, and uncertainties in inflation trends. These factors could necessitate rebuilding forex reserves to cushion against potential volatility in 2025.
Conclusion
The rupee’s record low against the dollar underscores the interconnected nature of global economies. While the Reserve Bank of India faces the dual challenge of stabilizing the rupee and preserving forex reserves, the broader economic outlook remains influenced by geopolitical shifts and monetary policy adjustments. India’s policymakers and businesses will need to navigate these headwinds strategically to maintain economic stability in the years ahead.
