The double-barreled intervention by authorities was hailed by investors as significant enough to spur as much as $50 billion into Indian bonds and stocks this year and reverse an outflow that’s dragged the rupee to a record low. The currency and bonds rose on the news.
But the reality is that India’s economy is facing a gloomy outlook: The Iran war is dragging on and straining energy supplies, fuel and fertilizer costs have soared, food prices are at risk of spiking, and there’s still no trade deal with India’s biggest trading partner, the US.
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That’s weighing on India’s growth outlook and — despite a surprise jump last quarter — economists are downgrading their forecasts to well below the 7% pace that’s made India in recent years the world’s fastest-growing major economy. The Reserve Bank of India on Friday projected growth of 6.6% in the fiscal year through March 2027, down from 7.6% last year.
BloombergEconomists point to the widening gap between India’s foreign inflows and outflows as a structural factor that’s weighed on the currency and growth. Part of the reason for that is India’s struggle to attract long-term capital through foreign direct investment. Net FDI has declined from $28 billion in 2022-23 year to just $7.7 billion in the year that ended in March.
Dhiraj Nim, an economist at Australia & New Zealand Banking Group, pointed to a number of factors that have combined to keep net FDI in India subdued. India is not a big player in the major tech sectors currently in vogue with foreign investors, such as chip manufacturing, electric vehicles or AI. At the same time, the growth of AI is posing a threat to India’s long-vaunted services sector, dampening investment. Broader forces like weak global trade and high interest rates are also a factor, he said.
“We don’t have those large sectors where globally trade is currently growing frantically in,” he said. “I think that’s a reason why FDI has stayed out or at least not come in hordes like we’re used to seeing.”
BloombergFriday’s announcements were targeted at institutional investors, with the government cutting the capital gains tax on bonds bought by foreign buyers and the central bank outlining steps to make it easier for foreign investors to buy government bonds and stocks.
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Indranil Pan, chief economist at Yes Bank Ltd., expects inflows of up to $45 billion on the back of those measures, almost enough to close India’s balance of payments gap for the fiscal year. However, he sees only temporary relief, and says “longer-term problems remain.”
“Unless more structural issues like ease of doing business, reforms in manufacturing sector and job growth are not addressed, India won’t be totally out of the woods and will continue to be exposed to global headwinds,” he said.
Part of the economy’s recent weakness can be chalked up to India’s vulnerability to fallout from the war in Iran. India imports about 90% of its oil needs, 40% of which passes through the Strait of Hormuz. As oil prices have climbed, Indian buyers have had to offload ever more rupees in order to buy dollar-denominated crude, putting heightened pressure on the currency.
Until the war in Iran, India’s economy had been showing signs of recovery, boosted by easier monetary policy and new trade agreements struck with the European Union and others, said James Thom, a senior investment director at fund manager Aberdeen Investments.
Before the war “it looked like the macro setup was pretty favorable,” Thom said. “I still believe that the underlying long-term structural growth story in India is intact.”