India Rupee Falls Beyond 85 Against US Dollar — Here's Why

The Indian rupee depreciated beyond the psychologically crucial mark of 85 a dollar right at open on Thursday, as the dollar index rose to over two-year high after the US Federal Reserve indicated fewer rate cuts in 2025.

The currency declined 11 paise against the greenback to a record low of 85.07 so far today, according to data on Bloomberg. Banks rushed to purchase the safe–haven US currency, which exerted pressure on the Indian unit.

On Dec. 18, the dollar index rose to 108.27, the highest level in over two years, as Fed officials reduced their rate cut projection for 2025 to 50 basis points compared to 100 basis points earlier. The central bank also raised inflation projection to 2.5%, compared to 2.1% earlier.

However, the RBI likely has intervened with dollar sales in the market to restrict sharp depreciation of the rupee, according to market participants.

The rupee took 46 sessions to depreciate from 84 a dollar to 85. The last time it took least number of days to depreciate one rupee was in October 2022. It took nine sessions to touch 82 a dollar level on Oct. 7.

In the last two and a half months, the rupee depreciated 1.19%. The dollar index and US Treasury yields continue to strengthen on risk–off sentiment, due to policy uncertainty in the US.

These are the factors weighing on the Indian currency.

The Indian currency started to feel the heat since the US election trend showed probability of Donald Trump winning. Trump's threat of higher tariff is expected to keep inflation high in the world's largest economy, which could leave little room for the Federal Reserve to cut rates.

Until there's more clarity over US President–elect Trump's trade and geopolitical policies, emerging market assets will likely struggle under pressure. The risk–off sentiment will prompt the traders to pull out their money from EM assets to safe havens, like the dollar index and US Treasury yields.

Trump's 'America First' policy will keep the greenback naturally strong against emerging market currencies. Since Nov. 4, the index, which measures the US unit against six major currencies across the world, rose 4.05%.

Weakness in the offshore Chinese yuan has also weighed on the Indian currency. The yuan has been under pressure because of the worries over its economic recovery lately. To add to existing problems, US President–elect Trump threatened to impose higher tariffs on China and Mexico, which subsequently weighed on yuan's outlook.

The Chinese yuan declined to the lowest level of 7.33 a dollar on Thursday, marking the lowest level since Nov. 3, 2023.

The foreign portfolio investors have sold the greenback persistently in the foreign exchange market as the take out money from Indian markets on risk–off sentiment. Disappointing second quarter earnings led to decline in India's benchmark indices in past two months, subsequently pressuring the Indian unit.

The NSE Nifty 50 declined 4.03% since early October, while the BSE Sensex fell 2.59%.

Foreign portfolio investors have pulled out Rs 942.52 crore from domestic financial markets till Dec. 17, according to data on Cogencis.