The Indian rupee breached the 85 per USD mark, setting a fresh all-time low as multiple factors weighed heavily on the currency. The depreciation is largely attributed to the hawkish monetary outlook by the Federal Reserve, which has led to reduced expectations for aggressive rate cuts in 2025.

This sentiment has been further exacerbated by capital outflows from Indian markets, as investors are drawn toward China's announcement of large-scale economic policy changes designed to boost growth and equity markets next year.

Federal Reserve's Impact on the Rupee

The Federal Reserve's widely expected 25-basis point interest rate cut came with a slower easing trajectory for 2025, which caught global markets off-guard. As a result, traders have adjusted their strategies, scaling back expectations for rate cuts next year. This has strengthened the US dollar and weakened other currencies, including the Indian rupee.

The strengthening of the dollar index, which recently hit 108.11, is pressuring emerging-market currencies. For the Indian rupee, this means higher import costs, particularly for crude oil, adding further strain on India’s economy.

China’s Economic Policy and Capital Outflows

Adding to the rupee’s woes is a significant pivot by investors towards China. The Chinese government has announced expansive economic policy changes, signaling strong measures to boost growth and equity markets in 2025. This announcement has made China a more attractive investment destination, resulting in capital outflows from rupee-denominated assets.

Exchange data highlights increased foreign institutional investor (FII) selling in Indian equities, with funds reallocating toward China. This trend aligns with investor sentiment that perceives China as a potentially higher-growth market in the near term.

Domestic Challenges

On the domestic front, the Indian rupee remains under pressure due to the country’s record-high trade deficit in November, signaling sluggish economic activity. Slowing domestic demand and weak export performance have added to the bearish sentiment for the rupee.

Moreover, the Reserve Bank of India (RBI) has revised its GDP growth forecast for the current financial year downward, from 7.2% to 6.6%. This move underscores the challenges facing the Indian economy, which is grappling with higher borrowing costs, weak consumer demand, and a global slowdown.

Calls for the RBI to initiate a rate-cutting cycle are growing louder as domestic growth prospects dim. However, any move by the RBI to reduce rates could further weaken the rupee, given the already widening gap with US interest rates.

Historical Context and Outlook

The Indian rupee's depreciation against the US dollar is part of a broader trend for emerging markets facing tighter global monetary conditions. Over the past year, the rupee has steadily lost value, reflecting both domestic economic weaknesses and external pressures, such as the Fed's monetary tightening.

In the near term, the rupee's trajectory will depend on a combination of factors, including:

1. Global monetary policy shifts, particularly from the Federal Reserve.
2. Domestic economic indicators, such as inflation and growth.
3. External developments, like China's policy measures and geopolitical dynamics.

Conclusion

The Indian rupee's drop to 85 per USD reflects a confluence of domestic and global challenges. While the hawkish Federal Reserve outlook has strengthened the dollar, domestic economic vulnerabilities and capital outflows to China have further pressured the rupee.

The record-high trade deficit and downward revision of GDP growth forecast are stark reminders of the headwinds facing the Indian economy. As the rupee continues to face pressure, policymakers and investors alike must navigate these uncertain waters carefully, balancing growth imperatives with the need for financial stability.

The Upcoming IPOs in this week and coming weeks are Ventive Hospitality, Senores Pharmaceuticals, Carraro India, Solar91 Cleantech, Unimech Aerospace, Rosmerta Digital, Indo Farm, and Avanse Financial.

The Current active IPO is Transrail Lighting, Mamata Machinery, DAM Capital  Sanathan Textiles, Concord Enviro, Newmalayan Steel, Identical Brain Studios and NACDAC Infrastructure.