USDINR surged despite upbeat GDP for H1 - Will RBI cut rate?
·
RBI may cut rates by 50 bps on December 5 to bring
back inflation (CPI) to the target 4.0% (from the present average 1.5%); core
CPI at 4.0%
·
RBI may also allow further depreciation of the
Rupee to support exports, and also to protect domestic producers from potential
cheaper imports as a result of various FTAs/BTAs
·
Even after considering MOSPI/Govt data at face
value, India's real GDP may grow around +6.8% in FY26.
·
If we convert India’s real GDP with the relevant
FY’s average USDINR exchange rate, the actual growth is around 3%; the real GDP
is hovering around $1.6T to $2.2T (2014-24)
·
India’s average unemployment rate is around 8% and
core inflation rate 5% (2014-24)
·
The government needs to ensure credible data like
core CPI, employment situation, GDP, and consumption (retail sales),
irrespective of any political narrative, to ensure effective policy.
On November 28, India's official government data
provider MOSPI's flash estimate shows India’s real GDP around INR 48.6T vs
47.9T sequentially (+1.6%) and 44.4T yearly (+8.2%). This implies that on a
standalone basis, India’s QTR real GDP grew +8.2% yearly (y/y). India’s
standalone Q1FY26 real GDP also grew an impressive 7.9%.
As India's QTR GDP data is not seasonally adjusted
and not annualized, we have to reconstruct the QTR data into TTM for a proper
perspective and a fair picture. India's real GDP was around INR 195.10T in
Q2FY26 vs 191.4 sequentially (+1.9%) and 179.2T yearly (+7.4%). Thus, India’s
real GDP grew actually around 7.4% rather than the blockbuster headline +8.2%,
although +7.4% real GDP growth is still very impressive and at current &
projected R/R, India’s real GDP may reach around INR 200.6T by FY26 vs 188T in
FY25 (Estimate), implying around 6.5%-6.8% real GDP growth. Also, India’s core
real GDP (Private consumption + Private Capex)
is slated to grow around +6.5%, in line with the overall real GDP growth
trend.
Similarly, Nominal GDP grew by around =9.6% in
Q2FY26 on a TTM basis and is poised to scale around INR 358.4T by FY26 vs 330.7T
in FY25 (provisional-will grow around +8.4%; Although it's still impressive,
overall R/R is slowing from previous/potential +13%.
In brief, India’s Q2FY26 real GDP growth is still
impressive, even after taking all the MOSPI data at face value, including
unusually low deflator (as a result of very low CPI/CFPI-food
inflation-favorable base effect). But going forward, in Q3, the economy may
slow amid a weak labor market and a higher cost of living (despite recent data
of low inflation).
If we
convert India’s real GDP with the related FY’s average USDINR exchange rate,
the actual growth is around 3%; the real GDP is hovering around $1.6T to $2.2T (2014-25);
the Average unemployment rate is around 8% and the
core inflation rate is 5%.
India's
Fiscal Tightrope: UPA vs NDA – A Tale of Similar Strains and Squeezed
Development Space
Overall Indian economic performance-no major
difference between UPA (2004-24) & NDA (2014-24); combined public debt
growing ~12% vs 13% against real GDP growth 7% vs 6%; Federal govt paying
almost 45% & 35% of its core revenue as interest on public debt &
salaries/pension alone; after freebies, little left for development of the
country.
India's economic journey under the United
Progressive Alliance (UPA, 2004–2014) and the National Democratic Alliance
(NDA, 2014–present) reveals a striking continuity in macroeconomic pressures,
despite differing global contexts and policy emphases. The overall performance
shows little divergence, with public debt growth hovering around 12–13%
annually against real GDP expansion of 6–7%, and committed (mandatory)
expenditures (interest, salaries, pensions) devouring 45% and 35% of core
revenue, respectively, leaving scant room for development post-subsidies. Both
regimes grappled with rising debt servicing costs amid moderate growth,
constraining capital outlays and long-term investments. This "fiscal
squeeze" has persisted, exacerbated by external shocks (global financial
crisis for UPA; COVID for NDA), but rooted in structural issues like high
committed spending and subsidy burdens. The NDA complicated the overall
economic trajectory by introducing higher & complicated GST and tariffs,
resulting in a higher cost of living and an affordability issue.
India
requires political & policy reforms from political funding to land, labor, and law. India needs to follow the
EU/US model of political funding, electoral reform, including constructive
debate on economic plan and other issues. India also needs to follow the
Chinese model of development, involving mostly local governments rather than
using it as a political PR campaign.
India's
external debt is now increasing rapidly above its FX reserve levels.
As of mid-2025, total external debt stands at
$747.2 billion (end-June 2025), reflecting a robust 10–13% year-on-year (YoY)
growth from $668.8 billion a year earlier. In contrast, FX reserves have been
on a declining trend, dipping to $687.0 billion as of November 7, 2025—down
$2.7 billion in a single week and over $8 billion since late October. This
marks the first sustained instance in recent years where debt has eclipsed
reserves (debt-to-reserves ratio now ~108.7%), reversing India's post-1991
crisis norm of ample reserve buffers (typically 100–110% coverage). While the
debt-to-GDP ratio remains moderate at 18.9% (end-June 2025), the rapid debt
accumulation amid reserve erosion signals heightened vulnerability to global
shocks like currency volatility or capital outflows.
USDINR may
scale 95-100 by 2026-27
Currency
and Import Risks: With 54% USD
exposure, further rupee weakening (projected 2–3% in FY26) could add $10–15
billion to debt stock via currency devaluation. Oil imports (80-85% of energy
needs) consume ~20% of reserves annually; Higher oil prices could drain another
$5–10 billion (if India is forced to buy US oil). India's M2 (MONEY SUPPLY) is
now growing above real GDP growth; this, along with increasing current account
deficit, ongoing FPIs outflow, Trump's bellicose policies from trade to
immigration, USDINR may scale 95-100 levels by 2026-27; the Indian economy may
face stagflation, further higher cost of living, and a weak labor market.
RBI/Government may be intentionally allowing
higher USDINR above 90 towards 95-100 by 2026-27 for export competitiveness and
potential cheaper imports from the US/EU/China despite intense domestic
political & media pressure for such currency devaluation. The MAY ALSO
government needs to provide some protection for domestic producers against
cheaper imports by making the USD stronger against INR. As domestic inflation
is low, the RBI can afford to allow a higher USDINR despite the threat of
higher imported inflation. RBI may also cut rates on December 5, 2025, to allow
INR depreciation further.
RBI should
cut rates from 5.50% to at least 5.00% by Dec’25 and further 4.00% by Dec'26 to stimulate muted
private capex, inclusive growth, and quality job creations. Although at
present, theoretically, RBI should not cut rates considering government data of
ultra-low inflation rate (~1.50% on an average-3M), moderate unemployment rate
(5.2%), and blockbuster GDP growth, considering the ground situation and actual
state of the overall economy, both RBI and the government should extend policy
support.
India's
'K'-shaped economy needs political & policy reform.
India's $3.9T economy (nominal GDP), often touted
as the world's fastest-growing major, is navigating a precarious path.
Highlights a confluence of red flags: M2 money supply outpacing real GDP growth,
a persistent current account (CA) deficit, potential rupee depreciation to ₹100/USD by 2028–29, and the specter of stagflation amid an
increasing K-shaped economy. These dynamics could indeed amplify cost-of-living
pressures and weaken the labor market, underscoring the urgent need for bold
political and policy interventions.
Jobless
growth in K-Shaped Economy: Thriving Elites, Squeezed Masses
India's post-COVID rebound remains starkly
unequal—a "K-shaped" recovery where high-end segments (tech, pharma,
equities) soar while informal labor (90% of workforce) lags. Urban consumption
dipped 2–3% in Q2 FY26 (rural up 1%), with two-wheeler sales (proxy for middle-class)
flat lining amid 7–8% food inflation. Labor market woes: Unemployment at 7.8%
(urban youth 17%), EPFO additions slowing to 1.2 million/month, and real wages
stagnant since 2022. India's $3.9 trillion economy risks a "lost
decade" without addressing these fissures. K-shaped inequities could fuel
social unrest.
India has
to improve its economic/labor productivity above GDP growth, so that higher GDP
will not cause higher inflation. For
India to achieve sustained 8–9% real GDP growth without triggering persistent
inflation, labor and total-factor productivity (TFP) must grow faster than GDP
itself. Historically, India has relied on factor accumulation (more capital +
more labor force) rather than efficiency gains. That model is hitting its
limits. Every 1% extra GDP growth currently requires
~0.6–0.7% extra employment + ~0.4–0.5% inflation pressure because productivity/efficiency
is lagging. This is exactly why 7–8% growth still produces 5–6% CPI and
occasional 7–8% spikes. To grow at 8% real with lower than 4% inflation, India
needs:
·
Labor
Productivity 7.0% vs 4% current
·
Total Factor
Productivity 4.0% vs 1.5% current
·
Employment
Growth 1.5% vs current 2.5%
Productivity
is the ultimate
India can keep printing 7–8% GDP growth with 5–6%
inflation forever — or switch to 8–9% GDP growth with 3–4% inflation forever. The
difference is that productivity is growing faster than GDP, not the other way
around. East Asia proved it is possible in one generation. India has the
demographic window until ~2040. After that, aging kicks in, and the game
becomes much harder. 2026–2030 is the last real shot at the productivity
supercycle. Everything else (rupee, inflation, jobs, inequality) will follow
automatically if we get this one variable right. But it may be very difficult
as India is a service & import-oriented economy, and that too being subject
to inefficient government employees.
Conclusions:
Overall muted reactions of the Indian stock market
even after blockbuster wins by Modi in state after state (HR, DL, MH, and BR)
after the June'24 general election debacle show Modinomics may not be working
fine amid increasing unemployment/under-employment, weak labor market, and
higher cost of living. Modi's mantra of reform & perform, and the marketing
theme of 6D (development, demand, demography, deregulation, digitalization, and
democracy) may now be in peril. India's so-called demographic dividend may now
be turning into a demographic nightmare, and GEN-Z protests/chaos amid a lack
of sufficient well-paid public and private jobs.
Higher cost of living is eroding discretionary
consumer spending and private consumption & CAPEX. So-called democracy is
now turning into an electoral autocracy. The model of Federal
government-centric & politically motivated so-called development is not
working properly simply because of the constant political game of chess. In his
15 years of administration with unprecedented political and public mandate,
Modi could go for real structural & monumental reforms in land, labor, and
law, along with politics & other policies. But Modi preferred the same Vote
Bank policies and went for incremental policy & process reforms.
Indian policy makers need credible basic economic
data like core CPI inflation and the employment situation of the country, along
with private consumption & capex data. But Indian politicians are unwilling
to publish such data and are more interested in the cast census rather than the
true economic census. India does not provide quality universal free/affordable
healthcare & education for its 1.5 billion people, and this, along with the
higher cost of living, has subdued private discretionary consumer spending.
Also, higher energy and other input costs are making Indian exports less competitive
in both the global & local markets.
Higher indirect taxes like GST and tariffs, along
with constrained supply of food items relative to demand and poor logistical
& warehousing infra, devalued currency, the cost of living is doubling
almost every 10 years. Although the economy is growing around 6% & 10% in
real and nominal terms, overall productivity is much lower, around 4%, which is
creating higher inflation of ~0.5% for every 1% additional nominal GDP growth. Although the total CPI inflation is now
turning into virtual deflation, it's purely due to the higher food inflation
base effect in the last year and should bounce back in 2026. The Indian core
CPI is now bouncing back to above 4%. Although the government (MOSPI) now
claims 5% average unemployment rate, it's around 8% as per private (CMIE) data.
Thus, it's safe to assume the headline unemployment rate is around 6.5%
(average) even after considering the huge surge in temporary gig workers.
Bottom
line: Nifty stumbled on lingering uncertainty about the US-IN trade deal and
muted earnings growth
Irrespective of political narrative, be it
Modinomics (Modi/BJP) or Rahulnomics (Rahul Gandhi/INC), India needs a complete
reset, right from political funding, the entire ecosystem of politics and
policies, to be a truly developed economy by 2047 or even by 2100. Although at present,
Nifty may again scale ATH 26500-27500 on the never-ending hopes of an imminent
US-India trade deal optimism, looking ahead, lower tariffs on US goods may also
hurt the bottom line of Indian corporates. For the time being, all focus would
be on earnings for Q2FY26, which is poised to come around 800 for Nifty. And at
around 26000, TTM PE would be around 32.5, in a clear bubble zone.
Technical
outlook: Nifty, Bank Nifty, and USDINR Future
Looking
ahead, whatever may be the narrative, technically Nifty
Future (CMP: 26050) now has to sustain over 26200-26300 for a further rally
towards 26500* and only sustaining above that further 26650/26800-27000/27500*
in the coming days; otherwise, sustaining below 26150, Nifty Future may slip to
26250/26000-25375*/24750 and 24400/24000*-23500/23100 in the coming days.
Technically,
Bank Nifty Future (59400) now has to sustain over 59800-60000* for a further rally to 60500/61000
and a a further 61500/62000-63000/65750 in the coming days; otherwise,
sustaining below 59700-59300, BNF may fall to 58400/58000-57700/57100 and
56500/56100-55600/55000 and further 54500-54000 in the coming days.
Technically,
USDINR-I now (90.50) has to sustain over
91.00-91.50 for a further rally to 92.50-94.50 in the coming days; otherwise,
sustaining below 90.00, USDINR may again fall to 89.50/89.00-88.00/87.50 and 87.00-86.50/86.00-85.50/85.00
in the coming days.
Disclaimer:
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