Key Highlights
- Headline inflation has dropped significantly from above 6% in October 2023 to 3.6% in February 2024.
- Key contributors to this decline include:
- Robust kharif production
- Improved rabi sowing
- Higher reservoir water levels
- Seasonal correction in vegetable prices
- This moderation in inflation is expected to cushion the Indian economy against trade tensions and global economic volatility.
India’s External Sector Strengths
- Resilient services exports continue to perform well, remaining largely unaffected by global disruptions.
- Structural strengths such as:
- Sound fiscal policies
- A calibrated monetary framework
- Strong digital transformation initiatives
are expected to underpin long-term, sustainable economic growth.
Monetary Policy Outlook
- The RBI reduced the policy rate by 25 basis points to 6.26% in February 2024.
- According to an ET poll of economists, another 25 bps rate cut is expected in April, given the inflation moderation.
Global Economic Concerns
- US tariff policies under President Trump are creating global growth uncertainty.
- Rising tariffs may push up consumer prices, which could raise inflation risks globally and impact growth in both emerging and advanced economies.
Risks for India
- Emerging economies, including India, are poised for faster growth than advanced economies.
- However, risks include:
- Capital outflows
- Currency depreciation pressures
- Since October, foreign portfolio investors (FPIs) have withdrawn $29 billion from Indian stocks, marking the largest six-month outflow.
Indian Rupee and Capital Flows
- FDI inflows remained strong, growing 12.4% year-on-year to $67.7 billion during FY25 (April–January).
- However, net FDI dropped to $1.4 billion from $11.5 billion a year ago due to higher repatriation and increased outward FDI.
- Outward remittances under the Liberalised Remittance Scheme (LRS) rose to $2.8 billion in January from $2.3 billion in December.
- Despite rupee depreciation, the Real Effective Exchange Rate (REER) stood at 102.37 in February, indicating the rupee remains overvalued by 2.4%, though improving from the November REER of 108.14.
Inflation Control Key to Navigating Global Headwinds
- With inflation easing, India is better placed to tackle external risks like trade tensions, capital outflows, and global volatility.
- Sustained fiscal discipline, monetary stability, and digital advancements will continue to be pillars of India’s economic resilience.
