Record Drop in Early Trade
The Indian rupee sank to a historic low of 85.06 against the US dollar in early trade on Thursday, December 19, 2024, shedding 12 paise from its previous close. Forex traders attributed the slide to a strong rally in the US dollar, driven by the Federal Reserve’s hawkish policy outlook for 2025. At the interbank foreign exchange market, the rupee opened weak and crossed the critical 85.00 mark, reflecting increased pressure on emerging market currencies. Contributing factors included heightened dollar demand from importers, foreign fund outflows, and subdued domestic equity trends. This decline followed a 3-paise drop on Wednesday, where the rupee ended at 84.94 against the dollar, marking consecutive record lows.
Hawkish Fed Fuels Dollar Rally
The US Federal Reserve’s cautious projections have sent ripples through global forex markets, particularly affecting currencies like the rupee. On Wednesday, the Fed announced a 25-basis-point rate cut but maintained a stern outlook, hinting at a prolonged journey toward achieving its 2% inflation target. Projections indicated additional rate cuts of 50 basis points each in 2025 and 2026, keeping the greenback in demand.
Anil Kumar Bhansali, Head of Treasury and Executive Director at Finrex Treasury Advisors LLP, noted that the Fed’s approach bolstered the dollar to near a two-year peak of 108.04 on the dollar index. “We anticipate a gradual depreciation of the Indian rupee as the Reserve Bank of India (RBI) is likely to intervene to protect key levels without altering the overall trajectory,” Bhansali remarked.
Global Market Repercussions
The Indian rupee’s decline comes amid broader market volatility triggered by the Fed’s policy stance. The dollar index, which measures the greenback’s strength against six major currencies, edged up by 0.01% to 108.03, reinforcing its robust position. Additionally, US 10-year bond yields climbed to 4.51%, further supporting dollar strength. Meanwhile, Brent crude oil prices dropped 0.42% to USD 73.08 per barrel in futures trade, reflecting the pressure from a stronger dollar and concerns over global economic tightening. Experts predict a continued strain on emerging markets as the Fed’s policies temper global investor sentiment.
The rupee’s depreciation underscores the challenges emerging economies face amidst shifting global monetary dynamics, highlighting the need for measured responses from policymakers to navigate economic headwinds.
