The Indian rupee slipped to its lowest-ever closing level on Monday (December 30), weighed down by a weakening offshore Chinese yuan and robust demand for the US dollar. The bearish sentiment surrounding the local currency added to the pressure.

The rupee ended the day at 85.5350 against the US dollar, slightly lower than its previous close of 85.5325, The Economic Times reported.

Despite reaching an intraday peak of 85.44, it lost ground in the latter half of the session due to sustained dollar buying by banks and a decline in regional currencies, according to traders.

Asian currencies broadly weakened during the session, while the dollar index edged up 0.1% to 108.1. The offshore Chinese yuan dropped 0.2% to 7.31, driven lower by rising U.S. bond yields. Adding to the rupee's challenges, its one-month implied volatility rose to 3.7%, the highest in over 16 months, signaling increased uncertainty.

Market participants highlighted rising expectations that the Reserve Bank of India (RBI) may ease its intervention in 2025, as the rupee continues to trade at its strongest levels against a basket of peers in two decades.

A growing bearish sentiment on the rupee has been attributed to multiple factors, including concerns over the Federal Reserve’s prolonged higher interest rate policy, sluggish capital inflows into India, and fears of global trade tariffs under incoming US President Donald Trump.

Reflecting this pessimism, the one-month dollar/rupee risk reversal rose to 0.4, its highest level since August 2024. This indicates that investors are increasingly hedging against further depreciation of the rupee.

The rupee’s trajectory highlights its vulnerability to global economic conditions, dollar strength, and policy uncertainties, underscoring challenges for traders and policymakers in navigating these headwinds.