Global Macro Research
Growth

Indian rupee in focus for policymakers in 2025

We forecast India’s economy to slow moderately in 2025, meaning a modest rate cutting cycle by the Reserve Bank. However, recent rupee depreciation risks delaying rate cuts, particularly if this is further exacerbated by the policies of the new US administration. That said, we continue to think India is a potential winner from trade tensions between the US and China.

Author
Emerging Markets Economist

Duration: 1 Min

Date: 24 Jan 2025

Key Takeaways

  • We expect the Indian economy to slow modestly, from 6.3% in 2024 to 6.1% in 2025, undershooting the Reserve Bank of India (RBI)’s expectations.
  • While the strong services sector should support activity, we think tight monetary and fiscal policy conditions and a sluggish manufacturing sector will weigh on growth. 
  • We believe this growth slowdown, alongside a softening of food price pressures, will prompt the RBI to deliver two 25bps interest rate cuts in February and June, taking the key policy rate to 6% by year-end.
  • Admittedly, there is a risk that recent rupee depreciation, which could be exacerbated by the policies of the incoming Trump administration in the US, could force the RBI to delay rate cuts until later in the year.
  • But we think new RBI governor Sanjay Malhotra will tolerate further rupee depreciation, given reduced domestic inflation risks, domestic liquidity challenges, and the previous loss of export competitiveness from past strength in the trade-weighted rupee.
  • That said, we expect the RBI to lean against particularly sharp FX moves, especially if substantial pressure on the currency were to arise from tensions with the US or broader market volatility. 
  • More broadly, we continue to think India can benefit from US efforts to shift supply chains out of China. 

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