Last Updated on February 14, 2025 by Bertrand Clarke
Jeff Snider – Eurodollar University – February 14, 2025
India’s economy, once hailed as a beacon of growth in a slowing global landscape, is now facing mounting challenges that are reverberating far beyond its borders. Last week, the Reserve Bank of India (RBI) cut its policy rate for the first time since 2020, a move that underscores the deepening economic turmoil in the world’s fifth-largest economy. The rate cut, a 25-basis-point reduction, comes amid a sharp decline in the rupee, plummeting stock markets, and growing concerns about deflationary pressures.
The rupee has been in freefall, hitting record lows against the U.S. dollar in recent weeks. On Friday, the currency slumped to 87.79 against the dollar, its weakest level in history, before sliding further on Monday morning. The RBI has been forced to intervene aggressively in the currency markets, with estimates suggesting it may have sold as much as $15 billion in foreign exchange reserves to stabilize the rupee. Despite these efforts, the currency remains under intense pressure, raising questions about the effectiveness of the central bank’s measures.
The economic data paints a grim picture. Consumer prices have declined for three consecutive months, with January recording a 0.97% drop, following a 0.56% decline in December. This accelerating deflationary trend is particularly alarming, as it suggests weakening demand across the economy. While falling food prices have contributed to the decline, the broader-based nature of the deflation indicates deeper structural issues.
India’s stock markets have also been hit hard, with the MSCI India Index recently touching its lowest level since June. Foreign investors have pulled billions of dollars out of Indian equities, exacerbating the sell-off. The nation’s $4.1 trillion stock market is now the worst performer in Asia this year among major economies, a stark reversal from its previous status as a regional standout.
The roots of India’s economic woes can be traced back to its reliance on government-driven growth, which has failed to spur a meaningful recovery in the private sector. While public spending has propped up the economy in recent years, private investment and consumption have remained lackluster. Adding to the challenges is a shadow credit boom that now appears to be unraveling, further tightening liquidity in the financial system.
The RBI’s dilemma is multifaceted. On one hand, it is grappling with a weakening currency and rising inflationary risks, which demand a hawkish monetary stance. On the other, it faces a slowing economy and deflationary pressures, which call for rate cuts and stimulus. Governor Shaktikanta Das has emphasized the central bank’s commitment to price stability, but the recent rate cut suggests that economic weakness has become too significant to ignore.
The ripple effects of India’s struggles are being felt across emerging markets. Stocks in emerging Asia have started to falter, with investors growing increasingly wary of the region’s economic prospects. While China’s slowdown has long been a concern, India’s downturn adds another layer of uncertainty to the global economic outlook. Together, these two Asian giants account for a significant portion of global growth, and their simultaneous struggles are raising red flags for policymakers worldwide.
The RBI’s interventions in the currency markets have come at a steep cost. India’s foreign exchange reserves have fallen by $81 billion since September, despite a modest recovery in recent weeks. This depletion of reserves highlights the scale of the challenge facing the central bank as it seeks to stabilize the rupee and restore confidence in the economy.
Meanwhile, interbank liquidity remains unusually tight, a consequence of the RBI’s efforts to support the currency. The central bank has injected billions of rupees into the banking system through open market operations and repo auctions, but these measures have done little to alleviate the broader economic pressures.
The situation in India is a stark reminder of the fragility of emerging markets in an increasingly volatile global environment. As the U.S. dollar strengthens and global risk appetite wanes, countries like India are finding it increasingly difficult to maintain economic stability. The RBI’s recent actions underscore the limits of monetary policy in addressing structural economic challenges.
For now, India’s economic trajectory remains uncertain. The government and central bank are walking a tightrope, trying to balance the need for stimulus with the imperative of maintaining financial stability. As the world watches, the stakes could not be higher—not just for India, but for the global economy as a whole.
In the words of one New Delhi-based investment officer, “The market is in panic mode.” And with good reason. India’s economic troubles are no longer contained within its borders—they are quietly spreading, and the world is taking notice.
