MUMBAI: India’s rupee plunged to a new all-time low, breaching the 85 per US dollar mark on Thursday, driven by a hawkish US Federal Reserve outlook, equity outflows, and persistent global uncertainties, experts say.
The Federal Reserve’s decision to temper rate cut expectations for 2025 has fueled a robust dollar, exerting pressure on emerging market currencies, including the Indian rupee. “The narrowing interest rate differential between the US and India has darkened the rupee’s prospects for 2025,” Sakshi Gupta, Principal Economist at HDFC Bank was quoted to have said.
Adding to the strain, the US Dollar Index surged to 108.27, and 10-year US Treasury yields climbed to 4.52 per cent, triggering capital outflows from emerging markets, noted Amit Pabari, MD at CR Forex.
He also pointed out domestic economic concerns: India’s Q2 GDP growth slowed to 5.4 per cent, inflation edged up to 6.21 per cent, and the trade deficit widened to $37.8 billion.
Trade deficit
Madan Sabnavis, Chief Economist at Bank of Baroda, cited the trade deficit and erratic foreign portfolio investments as key culprits behind the rupee’s decline. He added that a stronger dollar and potential Trump-led policy changes further exacerbated pressures.
Kunal Sodhani, VP at Shinhan Bank’s Global Trading Center, highlighted the interplay of domestic equity outflows, yuan weakness, and arbitrage opportunities between onshore and offshore rupee markets.
India’s FX reserves have been shrinking due to FCA revaluations and limited RBI intervention, indicating a cautious stance on sharp appreciation attempts.
Short-term, long-term outlooks
With mounting global pressures and equity markets reeling, Pabari predicts USD/INR could edge toward 85.20 in the short term, with Trump’s impending tariff policies poised to influence market sentiment. Sodhani sees 84.60 as a strong support level but warns that the door remains open for the rupee to test 85.50 levels.
Looking ahead, Gupta expects the rupee to slide further, potentially hitting 86.50 by the end of 2025 amid volatile foreign inflows and a persistently strong dollar. Soumyajit Niyogi from India Ratings & Research projects a 3 per cent depreciation to 86.9 by FY26, with the current account deficit hovering around 1.1 per cent of GDP.
As global and domestic uncertainties pile up, the Indian rupee’s path remains fraught with challenges, demanding vigilance from policymakers and market participants alike.
