Indian Rupee Hits Fresh Lows as Fed Hike Fears Weigh on Emerging Currencies

The Indian rupee hit a record low against the U.S. dollar on Thursday as global markets reacted to the dimming likelihood of a Fed rate cut in December. The currency weakened to 88.74 per dollar, just shy of its all-time low of 88.80 set in late September. Central bank interventions have so far prevented further depreciation, but continued pressure from importers and a firm dollar index kept the rupee under stress.

The dollar index surged to a two-week high as minutes from the Federal Reserve's October meeting signaled divided views among policymakers on a potential rate cut. With expectations for a December cut now below 25%, the greenback gained broad support against major currencies. The euro fell to $1.15, the yen hit a 10-month low, and the kiwi touched a seven-month trough.

Importers remained active buyers of dollars, driven by uncertainty around the India-U.S. trade deal and concerns over further rupee depreciation. Traders also noted that the Reserve Bank of India is likely to continue selling dollars to cap the currency's slide. However, the lack of clarity around U.S. trade policies and ongoing fiscal uncertainties continued to weigh on market sentiment.

Why the Rupee Pressures Persist

The dollar's strength has been further bolstered by a stronger-than-expected U.S. jobs report and the Fed's shifting policy outlook. Minutes from the October meeting indicated that many officials were against a December cut, with some viewing the current economic momentum as inconsistent with further easing. As a result, the dollar index climbed past key technical levels, pushing the rupee and other emerging market currencies lower.

India's trade situation remains fragile as the country grapples with a record trade deficit and high import demand. The U.S. is a major source of energy and commodity imports, and the ongoing delays in trade negotiations have left businesses and investors cautious. The government shutdown in the U.S. has also disrupted the flow of critical economic data, adding to the uncertainty. Traders are now waiting for the September non-farm payrolls report, which could provide fresh direction for the dollar and the Fed's path forward.

Market Reactions and Analyst Views

Offshore investors remain bullish on the rupee's long-term prospects, especially with Wall Street banks promoting trade-linked strategies that anticipate a potential U.S.-India deal. Citi and Goldman Sachs, among others, have recommended options bets that could benefit from a stronger rupee if a trade agreement is finalized. However, these optimistic views are tempered by the current near-term pressures, with the rupee remaining near its weakest levels. Options data shows that bets on a rising rupee are more expensive than those on a decline, indicating stronger market expectations for a recovery.

Analysts point to several factors that could influence the rupee's trajectory in the coming weeks. The Reserve Bank of India has been actively managing the currency through interventions and policy tools, but its ability to sustain the rupee's stability will depend on broader global conditions. Vishnu Varathan of Mizuho noted the unusual divergence between the yen's weakness and narrowing U.S.-Japan rate differentials, raising questions about the sustainability of current currency trends.

Looking Ahead: Trade, Rates, and the Rupee

The rupee's fate is increasingly tied to the outcome of U.S.-India trade negotiations. President Donald Trump has signaled that an agreement is "coming soon," and tariff reductions on Indian goods could provide a significant boost to the currency. However, the deal's final terms, including access for U.S. agricultural products and adjustments to India's oil-related tariffs, will determine the extent of the rupee's recovery.

Investors are also closely watching the Fed's policy path. While some economic indicators suggest a slowing labor market and cooling inflation, the central bank's reluctance to commit to a December cut has shifted expectations to the first quarter of 2026. Any surprise in the September jobs data or a shift in the Fed's stance could trigger a renewed dollar rally, adding pressure on the rupee and other emerging market currencies.