Indian Rupee Falls to Record Low of 84.30 as Strong Dollar Gains Momentum

Indian Rupee Falls – 5 Key Drivers Behind Rupee’s Decline and What Lies Ahead

1. U.S. Election Sparks Dollar Rally, Pressures Indian Rupee

The Indian rupee hit an all-time low of 84.30 against the U.S. dollar on Thursday, driven by expectations of a stronger dollar under Donald Trump’s anticipated presidency. Opening at 84.23, the rupee dipped further by 21 paise from its previous close of 84.09, reflecting concerns that Trump’s pro-growth policies may bolster the dollar at the rupee’s expense.

With Trump’s return, market sentiments favor a dollar rally supported by expected tax cuts and deregulation, prompting investors to seek dollar-denominated assets. The rupee is not alone in its slide; other Asian currencies have weakened similarly, underscoring the wider market reaction to U.S. election results.

2. Asian Currencies Slump Amid Trump’s Trade Uncertainty

Asian markets faced volatility as Trump’s win reignited fears of trade tensions, impacting currencies across the region. The Chinese yuan dropped 1.4% offshore—the largest decline in five years. Similarly, the Thai baht and Korean won fell 2% and 1.7%, respectively, as investors braced for potential tariff hikes and trade barriers that could slow regional economic growth.

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The rupee’s decline aligns with these losses as investors adjust their portfolios amid expectations of a stronger dollar and potential changes to U.S. trade policies. Such shifts may continue to place downward pressure on emerging market currencies in the near term, with the rupee particularly vulnerable.

3. RBI Intervenes to Curb Volatility as Rupee Slumps

The Reserve Bank of India (RBI) has intervened to stabilize the rupee, which could have seen a steeper fall without central bank support. By selling dollars to cushion the rupee, the RBI is attempting to manage volatility while also allowing gradual depreciation. The central bank’s involvement reflects a region-wide approach, as other Asian central banks, including those in China and Indonesia, work to stabilize their currencies.

RBI’s approach suggests a delicate balance between maintaining stability and adjusting to market pressures. Analysts believe further intervention is possible if the rupee approaches the 84.50 mark, a level that could spark fresh selling in the absence of support.

4. Federal Reserve Rate Decision to Influence Rupee’s Path

The U.S. Federal Reserve’s interest rate decision, expected later this week, is closely watched by markets for its potential impact on global currency dynamics. A 25-basis-point rate cut is anticipated, though analysts note that Trump’s pro-growth policies may limit the Fed’s flexibility for further rate cuts in 2025. This decision could either stabilize or exacerbate the dollar’s rally, influencing emerging markets like India.

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The Fed’s stance on rate cuts, combined with the dollar’s strength, could add to the rupee’s downside risks. If the Fed signals a cautious approach to additional cuts, the dollar may retain its strength, potentially driving more foreign investment outflows from India.

5. Rising Dollar Index and FII Outflows Intensify Pressure

The dollar index, which tracks the greenback’s strength against six major currencies, has risen by 1.34% to 104.80 in anticipation of Trump’s growth-focused agenda. This dollar strength adds strain on the rupee, especially as foreign institutional investors (FIIs) continue to withdraw funds. Tuesday saw FII outflows of Rs 2,569.41 crore, adding to a trend of selling that has pressured the rupee in recent months.

These outflows highlight investor caution about Indian equities in light of a stronger dollar, leading to increased selling in the Indian market. With sustained dollar strength, the rupee could remain on a downward trend, potentially requiring further RBI intervention to manage stability.

Economic Implications of a Weaker Rupee

A weaker rupee has mixed effects on India’s economy. Rising import costs, particularly for crude oil, could drive inflation upward, increasing prices across sectors. However, export-oriented industries, such as IT and pharmaceuticals, stand to gain as their dollar-denominated revenues convert to higher rupee earnings. This makes Indian exports more competitive on the global stage, potentially boosting these sectors.

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While the rupee’s fall benefits exporters, its impact on inflation remains a challenge for policymakers. The RBI’s future approach, balancing inflation management with currency stabilization, will be critical as global economic dynamics evolve in response to U.S. policy changes.