Rupee’s Drastic Fall For The 1st Time In History, Know WHY

The Indian rupee reached an unprecedented low, falling past the 85-mark against the US dollar for the first time in history. The currency depreciated by 12 paise, hitting an all-time low of 85.07 during morning trading. This drop is attributed to a hawkish stance from the US Federal Reserve, which triggered a widespread rally in the US dollar.

This sharp decline follows the rupee’s fall below the 84-mark on October 11, just two months earlier. The previous day, the rupee had dropped 3 paise, closing at a record low of 84.94, according to the Clearing Corporation of India Ltd (CCIL).

Anil Kumar Bhansali, head of treasury at Finrex Treasury Advisors, explained the rupee’s weakness: “The US Fed cut rates by 25 basis points but adopted a hawkish approach, indicating it could take another one to two years to achieve its 2% inflation target. This stance led to a strong dollar rally, with traders recalibrating their expectations for rate cuts, further pressuring global currencies.”

He noted that the US Fed now projects fewer cuts in rates over the next few years, predicting only a 50-basis-point reduction in 2025 and another 50 bps in 2026. This shift contributed to the dollar reaching a two-year peak, with the US 10-year bond yield rising to 4.513%.

At the interbank foreign exchange market, the rupee opened weak and continued its downward trajectory, breaching the crucial 85.00 mark against the dollar. It dropped to an all-time low of 85.06, marking a 12-paise decline from the previous day’s close. This decline was fueled by strong demand for dollars from importers, foreign fund outflows, and sluggish domestic equities.

“The broader sell-off in equities, commodities, and bonds has kept the dollar in demand. We expect a gradual depreciation of the rupee, as the Reserve Bank of India (RBI) may intervene to protect key levels but not change the overall trend,” Bhansali added.

The US dollar index, which tracks the greenback’s strength against a basket of six major currencies, was up 0.01% at 108.03.

Meanwhile, Brent crude prices fell by 0.42%, reaching $73.08 per barrel, reflecting the impact of a surging dollar and the Fed’s cautious stance on monetary easing.

In the domestic market, the Sensex was down 1.14%, shedding 910.95 points to 79,271.25, while Nifty dropped 1.16% or 281.15 points to 23,917.70 points. Foreign Institutional Investors (FIIs) also pulled out Rs 1,316.81 crore from Indian capital markets on a net basis.

The rupee’s weakness has been a result of both global and domestic factors. The rising trade deficit, exacerbated by record-high gold imports in November, has put additional pressure on the rupee. C R Forex Advisors’ Amit Pabari noted that India’s exports fell 4.85% year-on-year in November to $32.11 billion, while the trade deficit surged to a record $37.84 billion, largely due to the surge in gold imports, which hit $14.86 billion in the month. This increase in imports was driven by high demand during the festival and wedding seasons.

Also Read: US Fed’s Rate Cut Triggers Sharp Drop In Indian Stock Markets: Sensex, Nifty Fall