Rising trade protectionism, currency war threats may exert downward pressure on the Indian rupee, says RBI

The Indian Rupee depreciated vis-vis the US dollar during October 2024-March 2025, primarily reflecting the uncertainties due to disruptions in global trade, strengthening of the US dollar and capital outflows reflecting flight to safety, RBI said in its monetary policy report. Going ahead, restrictive monetary policy by the US Federal Reserve than what has been currently factored in by the financial markets could further lower the attractiveness of EME assets. Rising trade protectionism, currency war threats, and higher international crude oil prices are also some of the factors that may exert downward pressure on the Indian rupee, RBI said. In this scenario, if INR depreciates by 5 per cent over the baseline, inflation could rise by around 35 bps while GDP growth could benefit by around 25 bps through the trade channel in the short term. On the other hand, the Indian economy exhibits continued resilience in growth with a stable inflation outlook and is expected to contribute to revival of global demand conditions. These developments, along with faster resolution of trade protectionism and quicker than anticipated monetary policy easing by major economies, would lead to strengthening of the Indian Rupee. In this scenario, if the INR appreciates by 5 per cent relative to the baseline, inflation and GDP growth could moderate by around 35 bps and 25 bps, respectively, the central bank noted.

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