Rupee falls to historic low as FED signals hawkish stance

Mumbai: The Indian rupee fell to a record low, slipping past 85 to the US dollar for the first time on Thursday after the US Federal Reserve signaled fewer rate cuts next year battering Asian currencies.

The rupee hit a low of 85.0850 against the US dollar before closing at 85.07, down 0.1 per cent for the day. The rupee’s drop to 85 from 84 has taken place in about two months, while the decline to 84 from 83 took nearly 14 months. It took the currency 10 months to decline to 83 from 82 levels.

The Reserve Bank of India's (RBI) likely dollar-selling intervention helped the rupee fare better than most of its Asian peers such as the Korean won, the Malaysian ringgit, and the Indonesian rupiah which were down 0.8-1.2 per cent during the day. The Korean won dropped to its weakest level in 15 years, while the Indonesian rupiah hit a four-month low. India's forex reserves are at a five-month low after the RBI sold $38 billion between October and the first week of December. The dollar index has rallied more than 3 per cent since Donald Trump won the US presidential election on November 5. The rupee has declined just 0.8 per cent in that time, making it the second-best among major Asian currencies, largely due to the RBI's intervention.

The Fed cut its policy rate by 25 basis points as widely expected bringing down the Fed Funds rate to 4.25-4.50 per cent but projected only two more rate cuts of a quarter-percentage point by the end of 2025 as against the market's expectations of three or four rate cuts.

The revised projections indicate that by the end of 2025, Fed Funds rate could fall to 3.75 per cent to 4 per cent.�

Says Ritesh Bhansali vice-president Mecklai Financial Services, “Elevated rates, alongside the risk of higher tariffs being imposed at the start of U.S. President-elect Donald Trump's second term from January 20 will continue to exert pressure on emerging market currencies and we could see rupee going to 86.5 to 87 in calendar year 2025.”

Stock markets were disappointed with the Fed's projection. In the US, the S&P 500 and Nasdaq crashed 3 percent. The Indian stock market benchmarks, the Sensex and the Nifty 50, suffered losses of a per cent each. European markets also reacted sharply, with CAC, DAX, and FTSE indices plunging up to 2 per cent.�

As far as trade is concerned, a weaker rupee is good for exports and not for imports. Exporters mostly benefit from a weaker rupee, as their goods become cheaper and more competitive globally. However due to the trade deficit, net impact will be negative for India. For consumers, a weaker rupee translates into higher costs for imported goods such as fuel, electronics, mobile phones potentially raising inflation and eroding purchasing power. Companies that have raised� foreign currency debt would face steeper repayment costs. For outbound tourists a weak rupee will make their travel costlier while students studying abroad will have to set aside more money as a weak rupee will result in paying more for tuition fees.�