Key Positive Indicators
a) Rupee Stabilisation
- The rupee has strengthened from 87.5 (end-February) to just under 86 per dollar.
- This ends a six-month decline (Oct 2024–Feb 2025) when FPIs sold $22.7 billion in Indian equity and debt markets.
- The slowdown of FPI outflows and recovery of foreign exchange reserves to $654 billion-plus are encouraging signs.
- The merchandise trade deficit in February hit a 42-month low, further strengthening India’s external position.
b) Softening Inflationary Pressures
- February’s Consumer Price Index (CPI) rose by 3.6% YoY, below the RBI’s 4% target.
- Food inflation was modest at 3.75%, signaling relief from previous highs.
- Ground reports suggest a bumper rabi harvest, following:
- Strong monsoons
- Mild and short La Niña
- Absence of severe heatwaves
- Key crops (wheat, chana, onion) are expected to have strong output.
Implications for the Economy
- Lower food inflation may enable the RBI to cut interest rates.
- Consumption is expected to rise, as households particularly low-income ones spend less on food and more on other goods and services.
- Macroeconomic stability is improving, but external risks remain.
Risks and External Threats
- Potential trade conflicts due to US President Donald Trump’s trade wars and possible reciprocal tariffs on Indian exports.
- Although markets appear to be ignoring these risks (Sensex up 5.4% from recent lows), these threats could destabilize trade flows.
Policy Recommendations
- The government and RBI must remain vigilant and cannot relax policy measures.
- Priorities should include:
- Maintaining macroeconomic stability
- Lowering interest rates cautiously
- Ensuring adequate liquidity
- Continuing fiscal consolidation
- Strong domestic policy frameworks are the best hedge against external shocks.
While the strengthening rupee, increasing forex reserves, and easing inflation present a welcome change, it is essential for policymakers to exercise caution. A focus on macroeconomic fundamentals, disciplined fiscal policies, and proactive risk management will ensure that India’s growth trajectory remains resilient in the face of external uncertainties.
