Rupee breaches 85-mark, stocks reel as Fed’s slower rate cut forecast spooks markets

The US Federal Reserve brought its inflation concerns back to the centerstage of policymaking on Wednesday, while signaling a slower pace of interest rate cuts in the new year than earlier projected even as it slashed rates by 25 basis points. One basis point is one-hundredth of a percentage point.

Chair Jerome Powell’s remarks on tying future interest rate cuts to the progress in cooling a stubborn inflation that hasn’t hit the Fed’s 2% target for four years sent global markets into a tailspin, while the dollar rallied to its strongest level since November 2022.

The Fed penciling in only a pair of rate cuts in the whole of next year also dashed hopes of further policy easing.

The Fed has reduced rates by one full percentage point since September and the US central bank’s benchmark policy rate is now in the 4.25-4.50% range.

“If the economy remains strong and inflation does not continue to move sustainably toward 2%, we can dial back policy restraint more slowly,” Powell said.

“If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we can ease policy more quickly. Policy is well positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate,” he added.

US Treasury markets and stocks sank, while the dollar rallied to its strongest level since November 2022.

US stocks fell up to 3% while bonds plunged, sending the yields on benchmark 10-year Treasuries to their highest in about seven months.

In India, the rupee breached the 85 per dollar-mark to a record low, declining with most Asian peers as the Fed remarks weighed on sentiment.

The Reserve Bank of India’s intervention to prop up the rupee in the local currency markets has eroded foreign exchange reserves to the tune of $46 billion in the past two months, data showed.

Domestic benchmark indices Nifty 50 and Sensex dived about 1% on account of the Fed’s remarks on its new rate path.

At the close of trading on Thursday, the Nifty 50 ended at 23,951.70, lower by 247 points or 1%, while the 30-share Sensex ended at 79,218, down 964 points or 1.2%.

The outflows from stocks and bonds also piled pressure on the domestic currency.

The rupee has been hitting a series of record lows since 5 November, following the victory of US president-elect Donald Trump in elections.

This week, India’s trade deficit expanded more-than-expected in November, hitting a record $37.8 billion.

RBI had this month slashed India’s growth forecast for the current fiscal to 6.6% from 7.2% earlier, amid mounting calls for RBI to start cutting rates.

Meanwhile, Bitcoin slipped below $100,000 as the Fed’s cautious outlook hurt speculative investments.

Tokens including Ether and Dogecoin also declined.

In Japan, the yen skid about 1% after the central bank kept interest rates steady.

Bank of Japan governor Kazuo Ueda said he needed “one more notch” of information before committing to its next interest rate decision, a remark that cast doubt on whether the bank will hike rates in January.