The Indian rupee opened at 89.98, nearly unchanged from its yesterday’s close of 89.96. The local currency, which had been continuously breaching the crucial 90-level mark against the dollar, has been holding steady in some past sessions, largely attributed to the rate cut by US Federal Reserve Chair Jerome Powell.
On December 10, the US Federal Reserve’s Federal Open Market Committee (US-FOMC) decided to cut key benchmark rates by 25 basis points, attributed to soft labour market conditions and above-target inflation levels in the US economy.
Dollar index falls amid rate cut
The quarter-point rate cut set the new target range to 3.5% to 3.75%, which marks the third rate cut by the Fed this year. Further, Powell added that the central bank is not considering any interest hikes in the near term and is holding a closer-to-neutral policy stance. The rate cut is expected to soften the dollar and provide some support to the rupee.
Following the rate cut, the dollar index, which measures the strength of the dollar against a basket of six major currencies, fell to a seven-week low at 98.5. Further, traders are now weighing the expectation of two additional cuts in 2026.
What does the rate cut mean for the Indian rupee?
“For India, a more accommodative Fed and a maturing global rate cycle ease worries around dollar strength and capital outflows, creating a constructive backdrop for the rupee and domestic liquidity. In this environment, buying interest in financials, consumption, and select rate-sensitive sectors is likely to remain resilient, although phases of volatility may persist given the divided Fed and continued uncertainty over the 2026 policy trajectory.” Rajesh Palviya, SVP – Research, Axis Securities said.
“We think the peak rupee underperformance against the dollar is behind us. Still, we expect the INR to be range-bound if the U.S. trade-related uncertainty abates and capital flows recover, given we expect the RBI to replenish FX reserves amid higher dollar inflows,” Reuters quoted analysts at Goldman Sachs as saying in a note.
The firm has revised its forecasts for the rupee lower to 91 over the next 6 and 12 months, down from 87.50 and 86.50, respectively.
US FOMC cut rates amid weakening economy
The US Fed cut rates by 25 bps following weak labor market conditions across the country. The committee was increasingly split on trimming down rates as it had already eased its monetary stance in October. The December rate cut was approved with a 9-3 vote.
“In support of its goals and in light of the shift in the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 3-1/2 to 3-3/4 per cent,” said the FOMC in its official statement on Wednesday.
Commenting on the latest rate cut Powell added that this cut is intended to support the labour market amid rising unemployment.
“With today’s decision, we have lowered our policy rate three-quarters of a percentage point over our last three meetings. This further normalisation of our policy stance should help stabilise the labor market while allowing inflation to resume its downward trend toward 2% once the effects of tariffs have passed through,” Powell said in his speech.