Key Takeaways
- The global economic challenges facing the Indian economy include depreciation pressure, financial market volatility, and trade and policy uncertainties.
- The RBI’s monetary policy aims to stabilize the Indian rupee and mitigate the impact of global economic challenges on the Indian economy.
- The RBI’s decision to cut the policy repo rate by 0.25% to 6.25% has provided relief to borrowers and businesses, and is expected to ease inflation pressure.
New Delhi: The Indian economy continues to remain “strong and resilient” despite challenging global economic backdrop, but did not remain immune to these global headwinds, with the Indian Rupee coming under depreciation pressure in the recent months, says Reserve Bank of India.
The Indian rupee (INR) depreciated by 3.2 per cent against the US dollar since November 6, 2024, the day the presidential election results were announced in the US, largely mirroring the 2.4 per cent appreciation in the dollar index during the same period, RBI Governor Sanjay Malhotra said in his maiden monetary policy statement.
The global economy is growing at 3.3 per cent in 2025 and 2026, below the historical average of 3.7 per cent. This growth is hindered by services price inflation, which is stalling progress on global disinflation. High frequency indicators suggest resilience and continued expansion in trade.
The global composite PMI at 51.8 in January 2025 remained in the expansion zone even as services sector activity eased. The global manufacturing PMI at 50.1 also returned to the expansion zone after six months of contraction. World merchandise trade volume grew by 3.6 per cent (y-o-y) in November as per CPB Netherlands, World Trade Monitor.
With receding expectations on the size and pace of rate cuts in the US, the US dollar has strengthened and bond yields have hardened. Emerging Market Economies (EMEs) have witnessed large capital outflows, leading to sharp depreciation of their currencies and tightening of financial conditions.
Divergent trajectories of monetary policy across advanced economies, lingering geopolitical tensions and elevated trade and policy uncertainties have exacerbated financial market volatility. Such an uncertain global environment has posed difficult policy trade-offs for EMEs.
“The Indian economy, though continuing to remain strong and resilient, also did not remain immune to these global headwinds, with the Indian Rupee coming under depreciation pressure in the recent months.,” RBI Governor said adding at the Reserve Bank, we have been employing all tools at our disposal to face the multi-pronged challenges.
Amid easing inflation pressure, the RBI’s Monetary Policy Committee (MPC) on Friday decided to cut policy repo rate by 0.25% to 6.25% raising hopes of relief in loan EMIs. The RBI has cut the key interest rate in nearly five years.
