The Indian Rupee (INR) plunged to an all-time low of 86.2050 against the US dollar on Monday, breaching the 86 mark for the first time in its history.
The depreciation comes after robust US jobs data reignited expectations that the Federal Reserve would limit rate cuts in 2025, putting additional pressure on emerging market currencies.
Compared to Friday’s close at 85.9650, the decline reflects continued challenges for the rupee in the face of a strengthening dollar.
Heavy outflows from domestic equities, hawkish comments from the Federal Reserve, and rising crude oil prices could pressure the INR, given India’s position as the world’s third-largest oil consumer.
However, routine interventions by the Reserve Bank of India (RBI), including the sale of US dollars, may have helped cushion the INR’s losses.
US jobs report dampens hopes for Fed rate cuts
The US labour market exceeded expectations in December, adding 256,000 jobs compared to the 160,000 forecast by economists polled by Reuters.
The unemployment rate also unexpectedly fell to 4.1%, signalling resilience in the US economy.
The upbeat data has bolstered the greenback, with the dollar index climbing 0.22% to 109.72, its highest level in over two years.
Federal Reserve officials offered mixed signals on future monetary policy.
Fed Chicago President Austan Goolsbee said on Friday that if conditions are stable and there is no uptick in inflation, with full employment, the interest rates should go down.
Fed St. Louis President Alberto Musalem however said that greater caution is warranted in reducing interest rates, due to the risk that inflation might get stuck between 2.5% and 3% which has increased by the time of last month’s meeting.
How much further can the rupee depreciate?
Gavekal Research has raised the possibility of the rupee weakening further, potentially breaching the 90 mark against the US dollar in 2025.
The research notes that India may move away from its quasi-peg to the dollar, allowing the currency more flexibility but also exposing it to heightened volatility.
A bigger depreciation of around 10%, taking the rupee to 95 is “not out of the question,” analysts Udith Sikand and Tom Miller wrote in a note.
Currency traders are watching closely, with some highlighting that bearish bets on the rupee are likely to persist following the US labour market report.
“We may be nearing levels where the negatives for the rupee are priced in, but a correction is overdue,” a trader remarked.
Dhananjay Sinha, co-head of equities and head of research- strategy and economics at Systematix Group said that their global models suggest that robust US nominal GDP growth of 4.6% in 2025, higher-for-longer interest rates leading to a 10-year US Treasury yield of 4.0% (down from the current 4.6%), and a 2-month Treasury yield minus 5-year breakeven inflation of 1.9% could drive a stronger USD against both the Emerging Market (EM) Dollar Index and INR/USD.
This scenario implies a potential 5% depreciation in the EM currency index and a 7-10% decline in the INR.
Domestically, weak growth trends project a 4% trend depreciation for INR, with a peak decline of 9%.
At a current YoY depreciation rate of 3%, the INR remains in the lower band, signalling potential for sharper weakening.
Additionally, the negative India-US real policy rate spread (-1.7% in November 2024) and the overvalued broad real effective exchange rate (REER) add pressure. He said,
Considering all factors our estimates suggest that INR/USD can depreciate by 7-10% from the recent pegged levels of 84 to 90-92 in the coming 6-10 months.
Technical outlook: USD/INR signals caution
The USD/INR pair continues its upward trajectory, trading above its 100-day Exponential Moving Average (EMA).
However, the 14-day Relative Strength Index (RSI) has entered overbought territory, suggesting possible consolidation.
Resistance is seen at 86.15, with further gains toward 86.50 if momentum sustains.
Support levels are positioned at 85.85 and 85.65, with the psychological 85 mark providing a key floor.
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