Economy in Danger Zone — Warning Signs Impossible to Ignore
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The Alarms Are Getting Louder: India’s Economy Faces Its Most Unsettling Moment in Years. A Critical Appraisal of India’s Macro-Financial Pulse.
By P. SESH KUMAR
New Delhi, December 10, 2025 —December 2025 presents India with a macroeconomic scene that feels strangely familiar and quietly unsettling. Inflation appears to have has softened dramatically, gifting policymakers the luxury of a rate cut. Yet the rupee continues to drift to historic lows, foreign investors hover between caution and curiosity, and the broader economy moves neither spectacularly forward nor alarmingly backward.
Sectoral indicators—power, highways, credit, insurance—offer encouraging flashes, but every data point carries a subtext of fragility that the headline narrative glosses over. SBICAPS’ EcoCapsule captures the month’s optimism with professional polish, but the real story could be more layered: one where disinflation is more statistical than structural, currency depreciation is more signal than noise, and financial markets are more ambivalent than exuberant.
Inflation is the opening act, and it enters the stage wearing an uncharacteristically gentle expression. Headline CPI dips below 3% by October 2025, a level that would have seemed implausible just a year earlier. WPI goes a step further and slips into deflation.
At first glance, this looks like a policymaker’s dream-textbook justification for monetary easing. But the softness is less a consequence of deep structural reform and more a cocktail of base effects, benign weather, rural food corrections and the temporary cooling of commodity heat.
Core inflation remains obstinately sticky, refusing to follow headline CPI into this newfound calm. Manufactured inflation inches upward again by the year’s close. It is a comforting picture, but not an enduring one, and India has seen such fleeting disinflationary spells before.
The real test will arrive when the next food shock or global crude tremor hits.
Even as inflation cools, the rupee continues its quiet slide, breaching ₹90 per USD with an almost meditative consistency. SBICAPS emphasises that the current account deficit is contained, and technically it is. Yet the rupee is weakening for reasons that lie beyond the CAD arithmetic.
Imports, especially non-oil, surge again through mid-2025. Oil exports remain under pressure, reflecting weaker global spreads. Goods exports shrink in several months, and the overall trade deficit widens sharply in September and October.
The global dollar cycle is still dominant, and capital flows favour safety over yield. India’s depreciation is orderly, not panicked, but it still signals external vulnerability. Robust forex reserves cushion the journey, but relying on reserves is akin to relying on savings to pay recurring bills-it works until it doesn’t.
Foreign portfolio investors tell their own story. After a brief pause, they resume selling domestic equities, taking profits from India’s richly valued markets. At the same time, they cautiously accumulate debt as the country inches toward global bond index inclusion and yields appear attractive in a high-uncertainty world. FDI flows remain steady but unremarkable, neither weak nor electrifying-a quiet plateau rather than a breakout.
These are not the signs of an economy losing credibility; they are the signs of investors recalibrating expectations. SBICAPS attributes the shift to global jitters and AI-related volatility, but the deeper truth is that Indian equities had sprinted ahead of fundamentals, and a breather was inevitable.
Real-economy indicators offer a mixed palette. Power demand softens in November because the weather decides to be kind, creating space for lower spot electricity prices and bloated coal inventories.
FASTag collections rise relentlessly, proving that highway usage and digital tolling continue their upward march. Yet national highway awarding and construction remain well below the celebratory peaks of FY21, hinting that public capex momentum is no longer accelerating at the same fiery pace. The real economy is holding steady, but it is not firing on all cylinders.
Bank credit growth brings back some of the lost sparkle. Non-food credit rises above 12% by year-end, with MSMEs, infrastructure, pharma, electronics and trade driving the revival. A burst of personal loan activity emerges from festive spending, GST cuts, gold loan enthusiasm and housing finance demand. Yet banks find themselves navigating a delicate balancing act.
Deposit growth slows markedly, squeezing funding comfort. The credit–deposit ratio again crosses 80%, raising quiet liquidity concerns. WALR on fresh loans edges higher as banks rebuild margins. It is a revival with caveats: the momentum is real, but the balance sheets are stretched thin.
Insurance markets deliver one of the few unequivocally upbeat performances. Life and non-life premiums surge on the back of retail motor sales, health insurance demand and GST reductions. Private insurers outperform their public-sector counterparts by a widening margin. Capital markets, meanwhile, reveal a temperament of cautious optimism.
Equity mutual fund flows moderate. Debt funds regain favour as yields soften. Corporate bond issuance tilts heavily toward higher-rated papers, reflecting investor preference for safety in uncertain times.
NBFC participation retreats as funding costs rise. Public-sector issuers step forward to fill the gap. These are not signs of exuberance—they are signs of a market fumbling for stability.
The Monetary Policy Committee’s December 2025 decision—cutting the repo rate by 25 basis points to 5.25%-comes as no surprise. Inflation is soft, growth is steady, and a divided committee finally finds enough common ground to loosen policy. Yet the celebration is muted.
Liquidity remains tight, drained by tax outflows, festive season currency leakage and RBI’s forex operations. Money market rates hug the repo line. T-bill yields drift flat. Commercial paper issuance grows as corporates search for short-term funds.
Rupee Rails or Dollar Detour? India Seeks Settlement Autonomy
The RBI’s large OMOs and swap operations are not acts of confidence-they are acts of necessity. The central bank is stabilising the pipes even as the market applauds the tap.
Government securities behave like a yoga practitioner holding a perfect balance pose: the 10-year yield hovers around 6.5%, refusing to be drawn into anxiety or euphoria. But this calm is conditional. It depends on currency stability, RBI liquidity support, benign global cues and strong domestic demand. Corporate spreads tighten only for the strongest issuers; weaker credits feel the pinch.
State development loan spreads narrow due to moderated supply. Calm, in such circumstances, is less an achievement and more a temporary equilibrium.
SBICAPS’ yield outlook does appear sensible: a stable zone of 6.50% ± 25 bps. But stability in yields belies the fragility beneath. Currency volatility, unexpected crude spikes, higher-than-estimated borrowing or an inflation surprise could easily nudge yields out of their comfort zone.
India’s macroeconomic story, at this point, is one of steady ankles but uneasy knees.
Sturdy But Not Unshakeable Path Forward
India enters 2026 with a macroeconomic posture that is sturdy but not unshakeable. Inflation appears conquered, but mostly through arithmetic rather than structural fortification. Growth is respectable but not radiant.
The rupee’s slow slide reminds us that external risks remain alive. Bank credit momentum is welcome, but deposit mobilisation is sluggish. Market behaviour is steady, but investors are repositioning toward safety.
The country now needs a stronger export engine, with merchandise performance stepping up alongside services. Monetary easing must proceed carefully to avoid fuelling currency weakness.
Government capex cannot forever substitute for private investment; a handover is overdue. Bond market deepening, NBFC risk containment and improved disclosure norms will be vital to financial-system resilience. Liquidity management will determine whether credit revival sustains or fizzles out.
India’s economic narrative remains compelling, but it demands a sharper, more grounded reading-one that recognises the strengths without romanticising them, acknowledges the vulnerabilities without exaggerating them, and builds a policy agenda that is both ambitious and realistic.
(This is an opinion piece, and views expressed are those of the author only)
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