Rupee falls past 85/USD to all-time low after hawkish US Fed outlook

US central bank indicates more measured pace of rate cuts, triggering uncertainty across financial markets

The Indian rupee fell past 85 to the US dollar for the first time on Thursday after the US Federal Reserve indicated a more measured pace of rate cuts, triggering uncertainty across financial markets.

 

The US cut interest rates by 25 basis points to bring down the Fed Funds rate to 4.25-4.50 per cent. The rupee was trading at 85.06 per dollar a little after 11am. The yield on the 10-year benchmark government bond rose by 4 basis points and was trading at 6.79 per cent.

 

“The (US Fed's) tone was hawkish, now they are saying only two rate cuts in 2025, which is very shallow,” said a dealer at a state-owned bank. “The pressure on the rupee will remain and now the next level will be 85.50 per dollar.”

 

 

"From here, it's a new phase and we're going to be cautious about further cuts," said Fed Chair Jerome Powell.

 

At a post-meeting press conference, Powell noted that the Federal Open Market Committee can "be more cautious" about additional easing, given that rates have already been reduced by 100 basis points. He described the latest cut as "a closer call" compared to November, with one dissenting vote, and highlighted the need for further progress on inflation to justify more easing. Powell also pointed out that "we have been moving sideways on 12-month inflation."

 

The rupee hit a low of 85.0675 against the US dollar, down from 84.9525 on Wednesday. The pace of the currency's fall to the 85 handle from 84 has been faster than prior declines of the same magnitude, Reuters reported. 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.

 

“Mounting FX (foreign exchange) pressure and increasing cost of FX intervention. Conventional rate cut window is only going to get tight. Feb cut call gets trickier from here on,” said Madhavi Arora, chief economist at Emkay Global Financial Services.