By Mihika Sharma
The Indian rupee hit a record low of 85.08 against the dollar on December 19, 2024, following hawkish guidance from the FOMC. So far this month, the rupee has depreciated by 0.7%. However, this is still better than the depreciation seen in other currencies like the Indonesian rupiah (2.8%), South Korean won (3.7%), and Japanese yen (4.8%). RBI interventions have helped limit the rupee’s volatility and have capped its decline.
FOMC’s hawkish guidance weighs on emerging market currencies
In its December meeting, the Fed lowered its benchmark rate by 25 bps but signalled slower rate cuts in 2025, with the December dot-plot showing a 50 bps rate cut, down from 100 bps in September. The longer run rate projection was revised higher to 3% from 2.9% earlier, suggesting rates may stay higher for longer.
Expectations of slower progress on inflation led the FOMC members to reduce their rate cut projections. Inflation in 2025, the first year of the Trump administration, is now projected at 2.5%, up from 2.1% earlier. Further, inflation is projected to return to the 2% target in 2027 and not 2026 as previously projected.
The US yields have surged, and the dollar has strengthened following the FOMC meeting. The 10-year yield has risen by 35 bps so far in December to 4.5%, and the dollar index has strengthened by 2% to 107.9, putting pressure on emerging market currencies. The Fed is expected to keep rates unchanged in January.
Weak Yuan also adding pressure on Asian currencies
China’s November industrial production marginally exceeded market expectations, but weak retail sales (3% YoY growth in November vs expectations of 4.6%) and lower-than-expected exports (6.7% YoY growth in November vs expectations of 8.5%) highlight ongoing challenges. While Chinese policymakers have reaffirmed their focus on fiscal and monetary support, the weak data and tariff threats under Trump 2.0 continue to weigh on the yuan. The yuan has depreciated by 0.7% against the dollar so far this month, which is also affecting other Asian currencies, including the rupee.
India’s goods trade deficit reaches all-time high
India’s goods trade deficit widened to a record high of $37.8 billion in November from $27 billion in October. This increase was driven by higher gold imports, which rose to $14.9 billion in November from $7.1 billion in October.
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