 "Rupee slides past 85 vs $ to hit new low after hawkish US Fed outlook")
The rupee breached the psychologically significant 85-per-dollar mark, and government bond yields rose on Thursday following the US Federal Reserve’s meeting, which signalled a more cautious pace of future interest rate cuts, unsettling financial markets, according to dealers. Several Asian currencies performed worse than the rupee.
Indian equities also declined for the fourth consecutive session as the Federal Reserve projected only one or two rate cuts in 2025, contrary to expectations of three to four reductions. On Wednesday, the Federal Open Market Committee lowered the policy rate by 25 basis points, bringing the Fed Funds rate to a range of 4.25–4.50 per cent.
The Sensex dropped 940 points, or 1.2 per cent, to close at 79,242.61, while the Nifty 50 slipped 247 points, or 1.02 per cent, to 23,952. Over the past four sessions, the Sensex has declined by 3.5 per cent, and the Nifty by 3.3 per cent; investors have seen their wealth erode by Rs 9.65 trillion.
On Thursday, the rupee settled at an all-time low of 85.07 per dollar, compared with its previous close of 84.96. During the session, it touched 85.09 per dollar. Meanwhile, the yield on the 10-year benchmark government bond rose 4 basis points to 6.79 per cent and that on the US 10-year Treasury surged to 4.54 per cent -- the highest since May.
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The narrowing spread between US 10-year Treasury yields and Indian 10-year government securities, now near two-decade lows, could impact foreign portfolio investor (FPI) flows into Indian debt markets and may even lead to outflows, according to economists and market experts. Despite a strong return of FPIs to Indian debt and equity markets in December, partly reversing two months of outflows, their investments have been volatile in recent days.
On Thursday, FPIs were net buyers of government securities worth over Rs 600 crore under the Fully Accessible Route (FAR), but they offloaded equities worth Rs 4,225 crore.
It took the rupee just over two months to breach the 85 per dollar mark from 84 per dollar, while it had taken 475 days to move from 83 to 84 levels.
Foreign exchange participants noted that with the dollar index hovering around 108, rupee weakness is likely to persist. The Indian unit is expected to trade in the 85–85.50 range for now, with dealers anticipating stabilisation around 85.50 by March.
“With the dollar index around 108, rupee weakness will continue,” said the treasury head of a private bank, adding the RBI’s intervention strategy will also be constrained by liquidity conditions. “The rupee has reached the 85 per dollar mark and the 85-85.50 is the band that we think it is going to be playing in for some time now. And any further move will depend on the dollar index and how it plays out.”
Market participants highlighted that the rupee’s trajectory by March will hinge on factors such as the RBI's import cover and its intervention tactics. While the RBI is expected to curb intraday volatility, its capacity for sustained support may be limited by sizable short positions across maturities. Other factors include after-hours shifts in non-deliverable forward (NDF) markets, and the central bank's internal adjustments amid leadership changes.
Speculation about a year-end slowdown in FPI activity suggests the rupee may temporarily stabilise before resuming its depreciation. Dealers noted that the RBI has been conducting mid-tenor buy-sell swaps, effectively rolling positions forward for approximately six months.
“We need to consider the RBI’s import cover. That’s something which probably plays very heavily in the RBI's mind in terms of how much to intervene,” said another private bank treasury head. "We’re also seeing a lot of action in the NDF markets after the spot market closes. If the rupee weakens further in NDF trading, will the RBI step in before the domestic market opens to limit the slide?”
Despite recent weakness, the rupee remains one of the better-performing currencies in the region, supported by the Reserve Bank of India's (RBI) dollar sales in the foreign exchange market, according to dealers. The rupee weakened by 0.1 per cent on Thursday, compared to declines of 0.2–1.4 per cent among other Asian currencies. The Japanese yen was the worst performer.
The rupee has depreciated by 0.68 per cent in December and by 2.19 per cent year-to-date.
Meanwhile, banking system liquidity slipped further into deficit, with the shortfall widening to Rs 1.57 trillion as of Wednesday, according to RBI data.
Globally, gold prices rebounded on Thursday, recovering from a one-month low. Spot gold gained 0.7 per cent to $2,605.20 per ounce as of 6:30 pm IST. However, in New Delhi, gold of 99.9 per cent purity fell by Rs 800 to Rs 78,300 per 10 grams. Bitcoin also dipped briefly below $100,000, as the Federal Reserve’s cautious outlook weighed on speculative investments.