The spike in inflation in 2023 was fully understandable. It was a year of deficit farm output so food prices stayed high through the year. However, year 2024 has seen record Kharif output and even the Rabi output promises to be robust based on the overflowing reservoirs. In spite of that, the food inflation is high and shows no signs of normalizing. To add to that, even the core inflation is on the way up. The monetary policy choice in front of RBI is also limited with repo rates already at elevated levels of 6.5%. 

In the second quarter of FY25, the GDP growth fell to a multi-year low of 5.4%. The first advance estimate of FY25 GDP has been pegged by MOSPI at 6.4%. The catch is that it still assumes rather aggressive GDP growth in H2, so FY25 GDP growth could be lower than 6.4%. The big challenge is that capex growth for FY25 has been cut to 11% and with elevated rates, the private capex is just not picking up. Lower rates can fuel a spike in inflation and that would still hit real GDP growth. Inflation and growth is like a Catch-22 situation for the center. Damned if you do; or even otherwise. 

The one big concern in the last couple of months has been the vulnerability of the Indian rupee. The journey from 85/$ to 86/$ has been really rapid. It shows that either the RBI is not intervening or it sees no point in doing so. There are a number of reasons for the sharp fall in the Indian rupee. The current account deficit promises to get worse in the last two quarters, due to rising trade gap. The steady appreciation of the Dollar Index has also weakened the rupee. To add to that, China has weakened the Yuan to stay competitive under Trump tariffs. Above all, FPIs have been sellers in Indian equities on a persistent basis since beginning of October. Weak rupee calls a lot of assumptions to question. 

Some foreign investors privately admit that the coalition government may be struggling to assert its full control over the reforms process. NDA depends on the TDP and the JDU for support. As a result, the pace and urgency in reforms seen in the last two terms of the center is not visible in the third term. That is a factor that is worrying global investors and FDI flows alike. Most of them were willing to pay premium valuations for Indian stocks assuming robust reforms will justify high valuations. That is not happening. Also, there are concerns that fiscal prudence may also take a back seat. It is time to redeem the mojo!