Falling international crude oil prices to their lowest level in four years during the month also benefited the Indian currency as the country imports more than 87% crude it processes. India’s average crude oil import price fell below $70 a barrel for the first time since August 2021, raising hopes of a downward revision of petrol and diesel rates that could enhance the macroeconomic stability of an economy that imports most of its fuel.

After three months of net withdrawals, foreign investors pumped in over 4,200 crore rupees into the Indian equity market in April. According to the NSDL data, Foreign Portfolio Investors, or FPIs, made a net investment of 4,223 crore rupees in equities last month. The inflow into the equity market comes following an outflow of 3,973 crore rupees in March, 34,574 crore rupees in February and 78,027 crore rupees in January.

Escalation of trade and tariff tensions and the resultant financial market volatility have raised concerns regarding the weakening of global growth in the near-term, RBI stated in its April monthly bulletin. Although the dampening global economic outlook could impact India’s economic growth through weaker external demand, the domestic growth engines, viz., consumption and investment, are relatively less susceptible to external headwinds. Prospects for the farm sector have been boosted by the forecast of an above normal southwest monsoon for 2025, which could augment farm incomes and keep food prices under check. Headline inflation moderated to a 67-month low of 3.3 per cent in March, mainly due to a moderation in food prices.

The global economic landscape is rapidly evolving, with trade policy uncertainty emerging as the key driver of the near-term outlook, RBI noted. On April 2, 2025, the US announced a 10 per cent base tariff and reciprocal levies on approximately 60 countries, taking average US tariffs to their highest levels in over a century. A 90 day pause on implementation of tariffs was announced on April 9 for those countries which did not resort to retaliatory actions. These developments have stoked fears of a global trade war, and countries are still working out their appropriate response in this uncertain environment. The deleterious impact of these escalating trade tensions on global growth are, however, inevitable. As per the International Monetary Fund (IMF), these tariffs represent a significant risk to the global outlook at a time of sluggish growth. The Organization for Economic Co-operation and Development (OECD), in its latest global economic outlook, has assessed that increasing trade restrictions will contribute to higher costs both for production and consumption.

Foreign exchange reserves cover of imports stood at 10.5 months at end Dec-24: RBI

The Reserve Bank of India published its half-yearly report on management of foreign exchange. During the half-year period under review, reserves decreased from USD 705.78 billion as at end-September 2024 to USD 630.61 billion as at end-January 2025 and was at USD 668.33 billion as at end-March 2025. Although both US dollar and Euro are intervention currencies and the Foreign Currency Assets (FCA) are maintained in major currencies, the foreign exchange reserves are denominated and expressed in US dollar terms. Movements in the FCA occur mainly on account of purchase and sale of foreign exchange by the RBI, income arising out of the deployment of the foreign exchange reserves, external aid receipts of the Central Government and changes on account of revaluation of the assets.

RBI noted that at the end of December 2024, foreign exchange reserves cover of imports (on balance of payments basis) stood at 10.5 months (11.8 months at end-September 2024). The ratio of short-term debt (original maturity) to reserves, which was 19.1 per cent at end-September 2024, increased to 22.0 per cent at end-December 2024. The ratio of volatile capital flows (including cumulative portfolio inflows and outstanding short-term debt) to reserves increased from 67.8 per cent at end-September 2024 to 74.3 per cent at end-December 2024.

Outlook:

INR has been rallying in the last two months largely bolstered by prospects of foreign equity inflows, weakness in the dollar overseas and positive domestic macroeconomic data. RBI noted in its monthly bulletin that the Indian economy continues to remain resilient on strong domestic growth impulses and sound macro-fundamentals despite strong global headwinds emanating from trade tensions. Consumers and businesses remain optimistic regarding the economic outlook, limiting downside in the Indian currency.

However, improving US data and a hawkish stance by Federal Reserve citing uncertainty over US trade tariffs are seen supporting the US dollar which could add pressure on the Indian unit. Fed remarks suggested that the US central bank is not leaning towards cutting interest rates anytime soon. Adding to this, the US-UK trade agreement raises hopes for more such deals with other countries and helps ease concerns that an all-out trade war might trigger a US recession, in turn, acting as a tailwind for the US Dollar.

The Reserve Bank of India further lowered its key rate in its April monetary policy to lift India’s economic growth, potentially putting depreciating pressure on the rupee. Moreover, cross border geo-political tensions between India and Pakistan escalating as of now is also adding headwind on risk appetite and dampening the local currency which is quoting near Rs 86 per dollar mark.