External sector pressures a fresh challenge, says Finance Ministry

The Indian rupee has performed relatively well in the first half of this year, though signals of further interest rate increases from the U.S. Federal Reserve could raise pressure on the currency to depreciate further, making imports costlier even as exports may crawl, the Finance Ministry said on Saturday.

External sector pressures from the soaring dollar, higher interest rates and external financing are emerging as new challenges to India’s macroeconomic stability, the Ministry said, noting this is ‘no time for celebrations and complacency’ despite India’s robust growth and better management of inflation so far in 2022-23. Forex reserves are sufficient despite a rapid fall, it said.

Retail inflation has ‘remained stable’ and averaged 7.2% between April and September, lower than the 8% median inflation of major economies, the Ministry said the spike in September’s inflation to 7.41% was driven by what ‘appears to be mainly seasonal’ increase in food prices.   

“In the absence of any further weather extremities, retail inflation is expected to trend lower in the rest of the fiscal year,” it said in the monthly economic review for September. 

Arguing that the U.S. dollar’s appreciation against most currencies has been primarily driven by U.S. interest rate hikes, the Ministry said the rupee depreciated 5.4% vis-à-vis the dollar between April and September, compared with 8.9% depreciation of six major currencies. However, a chart shared in the review pegged the U.S. dollar’s appreciation against the Indian currency at 6.5%.

India’s medium-term growth rate is likely higher than 6%, the Ministry said, referring to the IMF’s forecast of 6.1% growth in 2023-24, following 6.8% this year.

“While capital formation and digitalisation boost medium-term potential growth rate, learning losses caused by the pandemic-induced shutdowns and rising obesity levels restrain it. A healthy and educated India is a productive India,” the Finance Ministry underlined.