Express View: On economy, a cautious optimism

From around 87.5 in end-February, the rupee has strengthened to a shade below 86-to-the-dollar, seemingly ending a veritable free fall over the last six months. This was a period, from October 2024 to February 2025, that saw total net sales of $22.7 billion by foreign portfolio investors (FPI) in India’s equity and debt markets. Those outflows have slowed, if not reversed, in the current month, even as the depletion of the country’s foreign exchange reserves — from nearly $705 billion in end-September to $624 billion by mid-January — has been stemmed. Add to this a 42-month-low merchandise trade deficit in February, the overall external finances look better compared to the situation a couple of months ago. But it isn’t just the rupee stabilising, the FPIs showing signs of returning to buy again and the forex reserves recovering to $654 billion-plus are also part of the good news.

Even more heartening, perhaps, is the softening of inflationary pressures. The 3.6 per cent year-on-year increase in the official consumer price index in February was lower than the Reserve Bank of India’s (RBI) 4 per cent target. The bugbear, food inflation, was also at only 3.75 per cent. Ground reports so far suggest a bumper rabi harvest this time, which should bring to an end a prolonged episode of elevated food prices from around July 2023 to December 2024. That, in turn, was largely courtesy the effects of a strong El Niño event from April 2023 through May 2024. Unlike in 2023-24, India has had both good monsoon rains and — thanks to a La Niña, albeit mild and short — no unduly delayed onset or early exit of winter. With no heat waves of the kind witnessed last March, the production prospects for most winter-spring crops — from wheat to chana and onion — are bright. Easing food inflation should, apart from making it easier for the RBI to cut interest rates, also spur consumption by releasing money that low-income households in particular can spend on other items.