On Wednesday, the rupee dropped to an all-time low of 84.94 against the US dollar.
The US Federal Reserve slashed interest rates by 25 basis points (bps) in its last meeting of the year on Wednesday, but was very hawkish in its approach as the central bank said it might take another year or two to get to 2% on inflation. The US central bank anticipates a 50 bps cut in 2025 and another 50 bps in 2026.
“The Fed announced a 25-bps cut, in line with expectations but the dot plot indicated that policymakers now anticipate just two rate cuts in 2025, compared to the four cuts projected in the previous quarter,” said Sriram Iyer, Senior Research Analyst at Reliance Securities.
The dollar index, which gauges the greenback’s strength against a basket of six currencies, was trading higher by 0.01% at 108.03 on Thursday, while the 10-year US Treasury yield crossed 4.50% mark on Thursday, hitting its highest level since the end of May after the US Fed’s policy decision and outlook commentary.
The new projections show that officials expect the core personal consumption expenditures price index to be stuck at 2.5% through 2025, significantly higher than the Fed’s 2% target, Reuters said.Fed Chair Jerome Powell said more reductions in borrowing costs hinge on further progress in lowering stubbornly high inflation. “From here, it’s a new phase and we’re going to be cautious about further cuts,” said Jerome Powell.The Fed’s hawkish outlook also triggered a sell off among Asian forex, with Indian rupee’s peers— the Korean won, the Malaysian ringgit, and the Indonesian rupiah–- down between 0.8% and 1.2% on Thursday.
Meanwhile, the Indian rupee has also been pressured by the country’s economic growth slowing to a seven-quarter low from July-September and with the merchandise trade deficit widening, the capital inflows are tepid.
In contrast, the Fed’s latest rate forecasts would provide an additional stimulus to the US dollar, which has been already showing persistent strength on the back of US President-elect Donald Trump’s incoming policies and in turn, weighing on the rupee.
“RBI will be present to curb further losses, but the Rupee could weaken further as the Fed also projected sticky inflation which also raises questions on the future rate cuts in 2025,” said Sriram Iyer, Senior Research Analyst at Reliance Securities.
Foreign Institutional Investors (FIIs) offloaded Rs 1,316.81 crore in the capital markets on net basis on Wednesday, according to exchange data.
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