Rupee likely to stay near record lows as strong dollar, US yields weigh

The Indian rupee is likely to hold near its all-time lows on Thursday, amid a dollar that remains well supported by expectations that the Federal Reserve will cut rates at a measured pace next year.

Long term US yields are at multi-month highs, further boosting the greenback.

The 1-month non-deliverable forward indicated that the rupee will be at 85.20-85.21 per dollar, barely changed from Tuesday when it dropped to a lifetime low of 85.2075.

After the rupee dipped past the 84 handle in mid-October, it has been a one-way road.

India's growth slowdown, tepid capital flows, the hawkish Fed outlook and worries over US President-elect Donald Trump's trade policies has spurred a near uninterrupted decline in the currency.

The rupee has repeatedly dipped to record lows and market participants reckon the losses would have been much larger if not for the Reserve Bank of India's regular interventions.

"USD/INR is firmly on its way higher, though the quantum of the move could still be restricted by RBI intervention," said Srinivas Puni, managing director at QuantArt Market Solutions.

"USD/INR should have been easily 86.50-87+", considering the extent of the dollar's move.

The dollar has rallied against its major peers and Asian currencies, helped by the rise in US Treasury yields since Trump's election victory in early November.

His policy plans of deregulation, tax cuts and tariffs on trading partners are expected to push up not only growth but also inflation, prompting investors to demand higher yields on Treasuries.

Amid the uncertain inflation outlook, Fed policymakers indicated earlier this month that they will deliver fewer rate cuts in 2025 that they had previously forecast.

Fed Chair Jerome Powell acknowledged that central bank staff and policymakers were beginning to at least preliminarily think through how Trump's policy plans will affect inflation.