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The weakening of the Indian rupee has undermined hopes that the new central bank chief will quickly cut interest rates to stimulate the country’s struggling economy.
The currency has repeatedly hit new lows, and Monday’s 0.7% drop against the dollar was the biggest one-day drop in nearly two years.
The decline and its impact on inflation have so far led economists to believe that Reserve Bank of India Governor Sanjay Malhotra and other monetary policymakers will lower the benchmark repo rate from its previous level of 6.5% next month. It shattered the nearly unified consensus. For almost 2 years.
The depreciation of the rupee is just one of many indicators that dampens the luster of what remains the world’s fastest-growing major economy.
India’s GDP growth rate for the quarter ending September fell sharply to 5.4% year-on-year, the lowest level in about two years, due to a slowdown in government spending, sluggish consumption, and sluggish corporate profits. .
Madan Sabnavis, chief economist at Bank of Baroda, said the rupee’s fall is serious for the new central bank governor, adding it has “clouded the view” that Malhotra’s first policy meeting, which is about to open, will see a significant rate cut. he added. Days after the central government announced its annual budget on February 1.
“Freefall affects imported inflation and therefore monetary policy, and that’s the challenge,” Sabnavis said.
India relies on foreign suppliers for almost 90% of its oil consumption, making it particularly vulnerable to rising oil prices due to new U.S. sanctions on Russian producers. Recent strong US economic data has also cast doubt on the need for the US Federal Reserve to cut interest rates, leading to a stronger dollar.
Stubborn inflation is eroding the purchasing power of hundreds of millions of poor and middle-class households in India and is at the heart of the RBI’s dilemma.
Buoyed by soaring vegetable prices, headline inflation breached the upper end of the central bank’s target range of 6% in October, but prices have since cooled and slowed to 5.2% in December.
Malhotra, who took office last month, had predicted that India’s economy would recover in 2025. The central bank said it would prioritize supporting a “higher growth trajectory” after his predecessor, Shaktikanta Das, was criticized by the government for keeping borrowing costs high.
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“It’s not an easy environment for the new president,” said Trinh Nguyen, emerging Asia economist at Natixis, adding that while most developing countries are struggling with a strong dollar, “India is not alone in this challenge.” added. “But fundamentally, I think growth will be the priority, even if the rapid depreciation of the rupee is a concern.”
The RBI intervenes regularly to support the currency, which has depleted almost $70 billion of foreign exchange reserves since reaching a record high of $705 billion in September.
Some economists say the lack of recent steps from a strong central bank to stem the rupee’s decline under the Malhotra government towards a more market-driven view of the currency could boost exports. We speculate that this may indicate a change in stance. RBI did not respond to requests for comment.
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Other experts are more optimistic about the impact of the rupee’s depreciation, believing the RBI has ample room to maneuver given the overall downward trend in inflation and the central bank’s still large foreign exchange reserves.
“I don’t think this is as big a deal as it’s being made out to be,” said Miguel Chanco, chief emerging Asia economist at research and consulting firm Pantheon Macroeconomics. Chanko said the rupee’s more than 4% depreciation against the dollar over the past year remains “quite manageable.”
“It’s worth remembering that there may have been a downshift for some time as they have looked expensive on a real effective exchange rate basis for the last 18 months or so,” he said.
More broadly, the RBI and the Indian government last month lowered their growth forecast for next year to the lowest level since the coronavirus pandemic, but the central bank said the economy was showing signs of bottoming out.
Mr. Chanko said this trend is likely to continue, given that India’s fiscal and monetary policies remain tight, households are weighed down by debt, and industrial capacity utilization remains low enough to trigger a new investment cycle. He said that view may be too optimistic.
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“There will probably be at least one more major downturn in headline GDP growth,” he said.
But another economist said the recovery in government capital spending, which was put on hold during last year’s general elections, could also bode well for India’s economy to recover in the coming months.
“The economy is structurally resilient,” said Poonam Gupta, executive director of the National Council of Applied Economic Research in New Delhi. “This is a cyclical economic slowdown that can easily be reversed with timely policy action.”
