A Cautious Optimism

Key Positive Indicators

• 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.

The Indian Express