Rupee hits record low amid economic slowdown; bond yields fall on rate cut bets

India’s GDP growth moderated to 5.4 percent year-on-year in the third quarter of 2024, the lowest since March 2023, and below consensus estimates of 6.5 percent.

The Indian rupee on December 2 hit a fresh record low against the US dollar after data revealed a sharp slowdown in economic growth. Bond yields also dropped to multi-month lows on expectations that the Reserve Bank of India (RBI) may cut interest rates sooner than anticipated.

The rupee ended at a record low of 84.70 per dollar, down 0.21 percent from its previous close of 84.50, following Friday’s government report showing the economy grew at its slowest pace in nearly two years. A stronger dollar, driven by US President-elect Donald Trump's push for BRICS nations to adopt greater reliance on the greenback, added pressure on emerging-market currencies.

Bond yields declined further as traders bet on potential easing measures from the RBI. The 10-year bond yield fell 3 basis points to 6.717 percent, while the 5-year bond yield dropped 5 basis points to 6.635 percent, both hitting levels last seen in March 2022. The RBI is set to announce its policy decision on December 6.

India’s GDP growth moderated to 5.4 percent year-on-year in the third quarter of 2024, the lowest since March 2023, and below consensus estimates of 6.5 percent. Growth in the first half of FY25 stood at 6 percent, with a slowdown visible in both private consumption and capital expenditure. Consumption grew at 6 percent, outpacing capex growth of 5.4 percent, while net exports contributed positively.

Analysts expect the rupee to remain under pressure due to FII outflows, a strong dollar, and recovering crude oil prices. Tariff threats from Trump may further strengthen the greenback. However, positive domestic market trends could provide some support, with USDINR expected to trade in a range of 84.50 to 84.95. Traders will also look for cues from the US ISM manufacturing PMI data.

IFA Global highlighted that the disappointing GDP data has shifted attention to this week’s RBI policy meeting, which was earlier anticipated to be uneventful. While a rate cut is unlikely, the RBI may announce measures to ease banking system liquidity, and any hint of a February rate cut will be closely watched.