Currency volatility seen among new structural shifts derailing India’s growth

The outlook for the new year remains cautious, with many of the risks from the previous year poised to escalate uncertainty and volatility, SBICAPS said in a report.

Fresh structural shifts, including currency volatility and supply chain diversification, are unfolding against the backdrop of trade wars, geopolitical upheavals, and political transitions, SBICAPS’ monthly EcoCapsule report for January said.

“Emerging risks—rising household debt, fluctuating foreign institutional investment flows, and global financial tightening—threaten to amplify economic fragility,” the report said, adding that for India, “navigating this storm will demand a nimble and cautious strategy.”

Balancing the promise of growth with the perils of disruption, only adaptability and resilience can transform this moment of flux into an opportunity to shape the economic destiny,” it said.

While grappling with the inflation-growth dilemma, currency movements are a pressing concern for the Reserve Bank of India (RBI). The rupee repeatedly touched record lows, with its relative outperformance against other struggling emerging market currencies offering little consolation.

The RBI’s steady interventions in the forex market drawing down reserves by $65 billion from the September 2024 peak controlled the depreciation, it said.

The rupee has depreciated 2.8% against the dollar in 2024, repeatedly touching record lows, the SBICAPS report said, added that currency movements are another pressing concern for the RBI.

A reasonable current account deficit, supported by robust services exports and remittances, provides some stability. However, volatile FII flows and lower net FDI remain pain points, putting sustained pressure on the balance of payments.

With record-high gold imports driving merchandise trade deficits to new peaks, navigating the rupee through the new year’s anticipated volatility will require a delicate mix of gradual depreciation, renewed net FDI momentum, and prudent RBI interventions, it said.

After a sluggish first half, SBICAPS said growth is expected to rebound in the second half of fiscal 2025, driven by government spending and festive momentum, lifting the gross domestic product in the second half higher than the first half.

However, rising household debt, coupled with global uncertainty, declining government spending and selective private investments, may pose challenges to the India’s growth momentum.

With corporate leverage, or the use of borrowed funds by businesses to finance their operations and investments, at a six-year low, sustained growth in the coming fiscal “will depend on the private sector stepping up its capex game” to drive the next wave of expansion, it added.

Driven by monsoon-related disruptions impacting industry activity, lower government capex, and potentially slowing urban demand, real gross domestic product growth slowed to 5.4% in July-September.

Growth in manufacturing gross value added (GVA), or the difference between the value of intermediate goods and services used in production and the total output of manufactured goods, also slowed sharply to 2.2%.

Consumer Price Index inflation eased to 5.48% year-on-year in November from the 14-month high of 6.21% in October, driven by a moderation in food prices, especially vegetables.

Core CPI inflation, measured by excluding food and energy prices, remained flatter at 3.7%.