Rupee May Decline Beyond 85 per USD Due to Fed's Clearly Hawkish Stance

The Indian Rupee is projected to depreciate below 85 against the US dollar for the first time on Thursday. This follows recent statements by Federal Reserve officials suggesting a reduced likelihood of interest rate cuts in 2025, which has driven the US Dollar Index to a two-year high.

The one-month non-deliverable forward indicates an opening rate of 85.04-85.06 Rupees per US dollar, compared to 84.9525 in the preceding trading session.

In the overnight market, U.S. equities experienced a significant decline, Treasury yields increased, and the dollar index surged after the Fed signaled a much more gradual approach to rate cuts than previously expected.

The median forecast from the Fed's Summary of Economic Projections now indicates two rate cuts in 2025, a reduction from the four cuts projected in September. During his post-policy press conference, Powell emphasized that the central bank will adopt a cautious stance regarding rate reductions in light of persistently high inflation.

The Fed officials' median forecast also suggests that inflation rates are likely to be higher than earlier estimates. The projection for core PCE inflation has been adjusted to 2.8% for 2024 and 2.5% for 2025, up from previous estimates of 2.6% and 2.2%.

In a note, Morgan Stanley stated, "Following the outcome of the December meeting, which was decidedly more hawkish than we anticipated, we change our outlook for Federal Reserve policy."

Morgan Stanley analysts now foresee the Fed implementing two rate cuts of 25 basis points each next year, specifically in March and June, having previously expected cuts in January, March, and May.

Analysts posit that the Federal Reserve's aggressive monetary policy may be contingent upon policy shifts anticipated under the incoming presidential administration.

A foreign exchange trader at a major bank noted that the President-elect's policy initiatives represent the most significant risk factor for the Indian Rupee in the coming year.

The Reserve Bank of India (RBI) faces considerable challenges in managing the currency. The RBI has actively managed foreign exchange reserves to moderate Rupee depreciation.