The Indian rupee extended its decline to over 86.6 per USD in January, the lowest on record, as increasing capital outflows, lower foreign exchange reserves, and the outlook of looser monetary policy pressured the sustainability of the rupee’s crawling peg. Evidence of a sharp slowdown to India’s economic growth reversed the previous consensus that it would outperform major emerging economies, driving investors to close positions on Indian capital markets and pivot to competing Asian assets. This was magnified by expectations that the RBI is due to commence its cutting cycle before the end of the financial year amid lower inflation and a sharp drop in GDP growth. The latest data indicated that inflation slowed to 5.2% in December, and the preliminary FY2025 GDP slowed to 6.4%, the lowest since FY2020 when excluding pandemic shocks. To add, the rapid deterioration in foreign exchange reserves raised speculation that the RBI may be forced to start relaxing its support for the currency.
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