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The Indian rupee is on shaky ground, with expectations to tumble past 85 against the US dollar as the Federal Reserve signals a more aggressive stance on interest rates.

What does this mean?

The Fed has flexed its muscles, indicating fewer rate cuts in 2025 than previously anticipated, causing the dollar index to soar to a two-year high. As a result, US equities have dipped, and Treasury yields are climbing. This hawkish position has nudged the rupee towards further depreciation against the dollar. Recent non-deliverable forwards suggest the rupee could open between 85.04-85.06, compared to 84.9525 in its last session. The Reserve Bank of India (RBI) has been intervening in forex markets to manage this slump amid these pressures. Elsewhere, Morgan Stanley now foresees the Fed reducing rates by 25 basis points twice in 2024, signaling less relief ahead for the rupee.

The dollar's strength is reverberating across global markets, with the rupee caught in its wake. As the Fed sticks to its guns with only two planned rate cuts for 2025 and persistent inflation concerns, Indian equities might face additional selling pressure, especially as foreign investors recently offloaded $281 million in Indian shares. With Brent crude prices and US Treasury yields also contributing to the volatility, investors might need to brace for economic adjustments.

The bigger picture: Steering through policy impacts.

US monetary policy changes could play a pivotal role in the dollar-rupee equation, potentially heightening policy-induced volatility. As the Federal Reserve and global monetary conditions evolve, the interplay between emerging market economies and the US financial landscape could see significant shifts. This emphasizes the need for India to strategically navigate external pressures with adept fiscal policies.