Budget 2025: Addressing Forex Reserves and Rupee Volatility
The performance of foreign exchange reserves, the rupee, and global economic conditions would hold the key for the most positive outlook in the Indian economy during the coming fiscal year 2025-2026 when Finance Minister Nirmala Sitharaman presents the Budget in February. After witnessing a sharp decline in foreign exchange reserves lately, amid high volatility in the rupee, the Union Budget is expected to pose several challenges to the government to address issues here.
At the end of January 3, 2025 India's foreign exchange reserves had reached $634.59 billion from the previous date of $5.69 billion. This marks a third successive decline in a row following the cumulative decline of $70.3 billion from the peak level of $704.89 billion in September 2024. The RBI has been playing an important role in managing this decline through interventions in the forex market to control rupee volatility as well as through valuation adjustments of foreign assets. This effort came with a price; reserves went as low as the past six months' record low.
The rupee also declined appreciably in the face of severe deprecation and went on to cross 86 to the dollar level recently. It went as low as 85.0850 on December 19, 2024. That was immediately after the Federal Reserve in the U.S announced less rate cuts in the following year. This has been compounded by the stronger U.S. dollar, and thus, the further weakening of the rupee. Other factors are the reduced inflow of capital, a larger trade deficit, and slower growth in India. To stabilize this, the RBI has been proactive in curbing excessive volatility by active intervention in the market.
The recovery signs have appeared. Foreign Portfolio Investors (FPIs) saw a strong reversal in December 2024 as they registered a net equity inflow of Rs 21,789 crore, after several months of heavy outflows. The turnabout ensured that the FPIs reported a total net inflow of Rs 6,770 crore for the year 2024 compared to outflows of Rs 15,019 crore at the end of November. This has reflected an upturn in investor sentiment, led by stabilizing economic fundamentals and renewed confidence in the market.
The global economic landscape is still being impacted by the policies of the Trump administration in the United States, especially on fiscal policies including tax reforms and increased government spending. These have strengthened the US dollar, hence affecting the value of currencies in emerging markets, such as in India. Geopolitical uncertainty and trade policies also heightened global market volatility, thereby affecting capital flows and investor confidence across the world.
With these dynamics in place, the Union Budget to be presented is likely to focus on stabilizing the economy, attracting foreign investment, and ensuring sustainable growth. Some of the measures that may be taken include tax reforms, incentives for both domestic and international investors, and policies aimed at strengthening India's economic resilience amidst global uncertainties.
