Economic and Financial Stability in India
Economic and financial stability is crucial for sustained development, particularly challenging for developing economies like India, which faced a balance-of-payments crisis in 1991. However, over time, India has adjusted its policy frameworks to enhance economic resilience and has not experienced an external crisis since then.
Macroeconomic Management in India
- Exchange Rate Policy:
- India has adopted a flexible exchange-rate policy, which is primarily market-driven.
- The Reserve Bank of India (RBI) intervenes to manage volatility caused by sudden capital inflows or outflows.
- During the pandemic, the RBI absorbed excess capital inflows, increasing foreign-exchange reserves by over $100 billion in 2020-21.
- In 2022, despite large capital outflows, RBI interventions helped contain market volatility, stabilizing reserves currently at over $700 billion.
- Inflation Targeting:
- Since 2016, India follows a flexible inflation-targeting framework for monetary policy.
- This approach helps contain inflation volatility, enhances policy transparency, and boosts confidence in policymaking.
- Fiscal Policy:
- India has implemented a rule-based fiscal policy, improving the fiscal deficit from 9.2% of GDP in 2020-21 to a targeted 4.4% this financial year.
Outlook and Challenges
- The stable macroeconomic environment, with robust bank and corporate balance sheets, lays the foundation for growth.
- Challenges remain due to external trade uncertainties, particularly with the United States.
- India needs to leverage trade as a growth driver, aim for a beneficial trade agreement with the US, and pursue internal reforms to support sustainable growth.
