You are currently viewing Indian Rupee Hits 85USD Mark Amid Aggressive US Fed Outlook

Indian Rupee Hits 85USD Mark Amid Aggressive US Fed Outlook

Indian rupee broke the 85 per US dollar mark on December 19, 2024 after the US Federal Reserve adopted a cautious approach towards rate cuts. This has caused shock waves in the global financial markets and affected both currency and bond markets. 

The US Federal Reserve has now reduced the interest rates by 25 basis points and brought the rate into the range of 4.25-4.50%. Although the Federal Reserve reduced rates, its tone remained hawkish, signaling a slower pace for future cuts. Fed Chair Jerome Powell stated that despite a 100-basis point reduction already made, the central bank would adopt a cautious approach moving forward. He emphasized that any further rate adjustments would be contingent on sustained progress in controlling inflation, with the Federal Open Market Committee (FOMC) expressing caution about additional cuts. 

This dovish outlook on rate cuts in the future has left its mark on the Indian rupee that fell to a low of 85.0675 per US dollar, down from 84.9525 the previous day. The pace at which it reached the 85 level is faster than earlier declines of a similar magnitude which underlines the pressure on the currency. The rupee has fallen from 84 to 85 in almost two months, whereas it took 14 months for the rupee to shift from 83 to 84. 

Market participants including dealers and economists believe that this downward pressure on the rupee may continue. “The pressure on the rupee will remain, and now the next level will be 85.50 per dollar,” said a dealer from a state-owned bank. Foreign exchange pressure and the increasing cost of intervention by the Reserve Bank of India are likely to make things more complicated. According to Chief Economist, Madhavi Arora of Emkay Global Financial Services traditional rate cuts are getting progressively limited with the possibility of another cut in February also becoming increasing uncertain. In this case, global market participants can only get accustomed to more conservative stances by the Fed on rate cuts, further clouding the outlook for the rupee as well as other financial markets.