Intro: As the rupee touches historic lows, global trade fractures. And after so many years recession fears resurface, India finds itself at a critical economic inflection point. In this in-depth conversation, Dr. Manoranjan Sharma, Chief Economist at Infomerics Ratings and senior journalist Mahima Sharma cut through the noise. They deeply decode currency volatility, growth sustainability, inflation risks and structural reform imperatives. From RBI policy to global tariff shocks and domestic demand, this interview examines where India truly stands and what it must do to secure resilient, inclusive growth ahead. An exclusive this week at Socio-economic Voices on Indiastat.
MS: Consistently falling Rupee. Did India falter if yes where? If not, what measures need to be taken to ensure it can be strengthened?
Dr. Sharma: The Indian Rupee’s drop to ?90.70 per US dollar, a historic low, on December 16, 2025, sparked concern and headline risk. This is not unique to India: currencies of import-dependent EMs tend to soften when the dollar is strong, global yields are high and risk appetite is shaky. Yet it made the Rupee the worst-performing Asian currency this year. In the historical and international context, the move reflects a long-term tendency toward gradual depreciation. And is marked by cyclical bouts of volatility.
The latest decline is driven by trade-policy uncertainty due to:
This was aggravated by a near-term demand-supply imbalance in dollars, amplified by India’s structural energy import dependence, which the currency struggles to withstand despite an improved trade deficit. A REER (Real Effective Exchange Rate)-based analysis indicates that the nominal INR slide against the USD does not necessarily mean a loss of external competitiveness.
The rupee depreciated against the Dollar by 4.7% on a yoy basis in 2025 and by 12.1% in REER terms. Recent depreciation has, however, been sharper, driven by a confluence of near-term global and domestic factors. Elevated global crude oil prices have significantly worsened India’s import bill, intensifying pressure on the current account and increasing demand for dollars. The Rupee had weakened by 8.7% in 2018, 14% in 2013 and 18.7% in 2008, the previous episodes of large-scale depreciation in the Rupee.
Strengthening resilience will require:
In an Op-ed for the Hindu Business Line published about twenty years ago, I discussed the concept of the “impossible trinity”, also called the “international trilemma” that an economy cannot simultaneously maintain a) fixed exchange rates, b) independent monetary policy and c) capital movements. This logic still holds.
MS: What's your take on certain experts asserting recession clouds are looming large even in India?
Dr. Sharma: We do not anticipate a recession or depression in India. However, there could be concerns if a sharp and persistent rise in unemployment and formal-sector layoffs were accompanied by sequential GDP contraction; a sudden stop in capital flows, a disorderly rupee depreciation well beyond peer currencies and stress in corporate and banking balance sheets; or a sustained collapse in tax collections and investment indicators, including core sector output, IIP and industrial credit, over multiple quarters.
As of late 2025, the IMF and domestic data show robust growth above 7% with a low current account deficit and no sign of an outright recession; the risk is more of growth slowing from high levels if shocks are mishandled. There must be an accent on close monitoring of widening trade deficits, persistent inflation, slowing global growth and potential job market weaknesses.
MS: India’s GDP growth is projected around 6.6% in 2026, ahead of China - is this sustainable? Are we seeing a real shift in India’s growth model and which sectors you really think will drive this and why?
Dr. Sharma: India’s economic resilience rests on a solid macroeconomic base.
The IMF projects India’s real GDP growth at roughly 6.6% in FY26, easing to about 6.2% in subsequent years. Even with this moderation, India is expected to remain the fastest-growing major economy. That's well ahead of China’s sub-5% growth outlook. This performance is underpinned by strong domestic consumption, sustained public infrastructure spending and relatively limited exposure to global trade disruptions. Continued reforms and fiscal and financial stability will be critical.
Growth is being driven by a public-capex-led investment cycle, large-scale infrastructure development. This along with a strong services sector encompassing IT, financial services and travel.
Manufacturing is gaining momentum through the Production-Linked Incentive (PLI) schemes and global supply-chain realignment. This is helping industries like pharma, automobiles, electronics, auto parts and some chemicals. Higher incomes, urban growth and more formal jobs support spending. But investment and better productivity are now more important for growth.
Domestic demand is now a strong support for the economy. However, long-term growth will need a slow move from government spending on projects to higher private investment and stronger exports. The medium-term outlook is positive.
This is backed by
Risks persist. Global risks such as geopolitical tensions, fresh tariff pressure from the US, extreme weather and unstable financial markets can impact exports, capital flows and inflation. India also faces a long-term challenge of making growth inclusive, so benefits reach rural regions, the informal workforce and lower-income households.
Despite global uncertainty, India’s economic flexibility and resilience give it a strong base. Long-term success will depend on how quickly policymakers and businesses adjust, invest in resilience and sustainability and drive growth that creates opportunities for all and lasts over time across sectors and regions nationwide.
MS: Compared with China and other large economies, where does India stand structurally?
Dr. Sharma: India is growing steadily at about 6.5–7%, making it the fastest-growing large economy today. China’s growth has slowed to nearly 4–5%, while developed economies like the US and EU grow at around 1.5–2%. Still, India starts from a much lower level. Average income per person and productivity are far below those seen in China and advanced nations.
Structurally, India is in a phase of catching up. It has a large, young population and institutions that are improving over time. At the same time, it faces gaps in skills, education, infrastructure and the ability of the state to deliver services.
At the macro level, India has built a policy framework. This includes inflation targeting, the GST and fiscal rules, even though public debt remains high. China uses a currency and finance, while advanced economies rely on central banks and markets.
MS: What are the biggest structural challenges India must address to keep this momentum?
Dr. Sharma: India’s growth momentum faces several structural constraints. Key labour-market challenges include:
Infrastructure gaps in transport, energy and logistics continue to raise costs and reduce competitiveness, while heavy dependence on imported oil and electronics exposes the economy to external shocks.
Human capital challenges are serious. Learning levels, health outcomes and the quality of higher education remain below what is needed for a productive economy.
Although bank balance sheets have strengthened, financial intermediation remains incomplete, with shallow risk-capital markets limiting financing for SMEs, innovation and infrastructure. Additional weaknesses include limited export diversification, insufficient trade integration, rising climate and sustainability risks and uneven state capacity. Regulatory uncertainty, slow dispute resolution and inconsistent policy implementation across states continue to deter large-scale investment.
Addressing these challenges will require coordinated, cross-cutting reforms between the Union and state governments. All this, rather than incremental or siloed central schemes.
MS: Which fiscal policies will need to adjust and why if growth surprises India towards the flipside?
Dr. Sharma: If economic growth turns out to be much weaker than expected, the government will need to adjust its spending carefully. They must not not rush into big giveaways. The focus should be on spending money better, not just spending more. All this, while keeping trust in the economy strong.
This would mean putting more money into areas that create wider benefits, like roads, hospitals, schools and well-targeted welfare support. At the same time, wasteful subsidies and short-term populist schemes would need to be reduced. Strong systems like unemployment support and social security should work automatically, so people get help without the government announcing new packages every time.
At the same time, strict limits on deficits would matter. Government debt is already high and large uncontrolled spending could push up borrowing costs and worry investors. Even if deficits rise slightly in the short term, clear plans to control them over time must remain in place.
Tax reforms would support this effort. Making GST simpler, improving tax compliance and using property and land taxes more effectively could raise revenue without increasing tax rates, which can discourage investment. If slower growth is caused by global trade issues, such as higher US tariffs or protectionist policies, focused help for export-linked sectors and finding new markets would work better than blanket stimulus.
On the other hand, if growth turns out stronger than expected, fiscal policy should shift toward expanding infrastructure spending, encouraging private investment and job creation. All this towards controlling inflation, improving tax collections and speeding up deficit reduction.
MS: With inflation below target, could the RBI cut rates again? What would be the risk?
Dr. Sharma: Yes, but cautiously. Headline CPI inflation has fallen sharply, with recent prints hovering near or even below the lower bound of the RBI’s 2–6% target band. In response, the RBI has already begun easing policy, cutting the repo rate by 25 bps in December 2025 to around 5.25%, citing inflation close to 2% alongside resilient growth.
Case for Further Easing - With inflation undershooting the target, real policy rates remain relatively restrictive. This gives the RBI room to consider additional, calibrated cuts to support investment and consumption, lower borrowing costs amid global monetary easing and prevent an unnecessary slowdown if disinflation persists.
Key Risks - However, the space for aggressive easing is limited for multiple reasons, viz., inflation risks (persisting vulnerability of food and energy prices to weather shocks and geopolitical disruptions), financial stability (prolonged low rates risk fuelling asset price bubbles or misallocating credit), external balance (faster easing could weaken the rupee, complicating imported inflation and capital flows) and policy credibility (over-easing now could force a sharp reversal later, undermining forward guidance).
Optimal Policy Stance - The most prudent approach in this “Goldilocks period” is a gradual, data-dependent easing cycle, characterised by keeping real rates modestly positive, prioritising clear forward guidance over large, front-loaded cuts and retaining flexibility to pause or reverse if inflation shocks emerge. To be sure, with inflation below target, the RBI can cut again, but the emphasis should be on measured adjustments - not aggressive accommodation. This balances growth support with inflation control and financial stability in the pursuit of adroitly straddling the growth-inflation trade-off that gives room for cautious optimism.
MS: What risks remain on the inflation front that policymakers should watch? How do you balance growth support and inflation control right now?
Dr. Sharma: Inflation looks calm right now, but many risks still remain, like global commodity price swings, supply chain breaks, and weather shocks that hit farms and food costs. At the same time, steady growth with stable prices will need careful money policy and strict control on spending.
Keeping this balance needs a strong promise to the 4% inflation goal, allowing short slips but not letting 2% turn into the real aim. Rate cuts must be used with care, along with safety tools like loan limits and sector risk checks, to stop too much credit build up growth.
Close coordination with fiscal policy is also essential, especially to soften food and fuel price shocks through good buffer use and supply fixes, instead of only tightening money. This helps turn a short term sweet phase into lasting growth. In the end, protecting the trust in inflation targeting is vital, as it supports currency stability and keeps long term borrowing costs steady for investors, lenders, and households across the economy over time while confidence stays strong during shocks and uncertain periods.
MS: Can India rely on domestic demand as its growth engine amid global turmoil?
Dr. Sharma: Domestic demand driven by consumption and investment has remained India’s primary growth engine, showing notable resilience even as global conditions worsen. This strength offers a degree of insulation from worldwide slowdowns, particularly when compared with economies that rely heavily on exports. Expanding export diversification and lowering import dependence would, however, further reduce India’s exposure to external shocks.
The most effective path forward is a balanced growth model: robust domestic demand complemented by competitive exports and deeper integration into “China+1” supply chains. Achieving this will require targeted trade policies, improved logistics and regulatory reforms that position India as a dependable manufacturing and investment hub in an increasingly fragmented global economy.
MS: How exposed is India’s economy to global trade shocks like tariffs? And what all key measures we must take on war footing?
Dr. Sharma: India remains exposed to shifts in global trade dynamics stemming from U.S. trade actions, rising protectionism and geopolitical frictions. The U.S. decision to impose up to 50 % tariffs on a broad range of Indian exports serves as a real-time stress test of this vulnerability.
To mitigate such risks, India must pursue a multi-pronged strategy:
At the macroeconomic level, maintaining ample foreign exchange reserves, exercising caution in external borrowing and preserving exchange rate flexibility will be essential to cushion the economy against external shocks and sustain resilience. The pathway to the future requires sustained reforms, sustained investment and fiscal discipline.
MS: Beyond raw GDP numbers, what structural gaps should we be worried about?
Dr. Sharma: GDP growth masks several deep-rooted structural gaps that warrant closer scrutiny. These include the need for:
Addressing this agenda is a humongous task. It calls not merely for macroeconomic fine-tuning, but for coordinated and sustained action. This would be long-horizon public investment, governance reforms and effective coordination across different levels of government, undertaken with a clear sense of urgency.
MS: How do you see India’s role in the global economy evolving over the next decade?
Dr. Sharma: Over the coming decade, India is poised to become a major engine of global growth and a pivotal player in trade, technology and climate governance. The IMF and other international institutions already identify India as one of the largest contributors to global output growth. This is reflecting its scale and strong projected expansion. India is expected to account for an increasing share of incremental global GDP, positioning itself as both a vast consumer market and an attractive destination for global investment.
With sustained reforms, India is also likely to consolidate its role as a key “China+1” hub. We are excelling at offering an alternative base for global supply chains in sectors such as electronics, pharmaceuticals, automotive manufacturing and digital services.
At the same time, its digital public infrastructure spanning payments, digital identity and data governance has the potential to shape standards across the Global South, reinforcing India’s influence as a digital and financial norm setter. Coupled with its growing engagement in climate and energy transitions, these trends unmistakably reveal India’s emergence as a central actor in the global economic order. In sum, India is here to stay in the global pecking order and is likely to consolidate its position in the comity of nations.
About Dr Manoranjan Sharma
Currently the Chief Economist at Infomerics Ratings, Dr Sharma was earlier Chief Economist, General Manager and Chief Learning Officer at Canara Bank. Recognised as one of 30 global experts by UN Virtual University, he is an expert in Indian economy, banking, MSMEs, rural credit, financial inclusion, etc. With multiple globally accepted papers, he is a member of over 12 Advisory Councils across States, vis., Member, Governor’s Advisory Council, Rajasthan; Chancellor’s Senate Nominee, SNDT University, Mumbai; Chancellor’s Senate Nominee, Rajasthan University, Jaipur; Expert Member, BIRD, Lucknow; etc. He is associated with banks, IITs, IIMs, Universities, Terrapinn Pte Ltd. (Singapore); Marcus Evans (Malaysia); Naseba (Paris/Dubai); Government of India and State Governments. He has published 6 books and 300 papers in India and abroad. His views have been cited in The Associated Press (New York), Dow Jones (New York), International Herald-Tribune (New York), Wall Street Journal (New York).
About the Interviewer
Mahima Sharma is an Independent Senior Journalist based in Delhi NCR with a career spanning TV, Print, and Online Journalism since 2005. She has played key roles at several media houses including roles at CNN-News18, ANI, Voice of India, and Hindustan Times.
Founder & Editor of The Think Pot, she is also a recipient of the REX Karmaveer Chakra (Gold & Silver) by iCONGO in association with the United Nations. Since March 2022, she has served as an Entrepreneurship Education Mentor at Women Will, a Google-backed program in collaboration with SHEROES. Mahima can be reached at media@indiastat.com
Disclaimer : The facts & statistics, the work profile details of the protagonist and the opinions appearing in the answers do not reflect the views of Indiastat or the Journalist. Indiastat or the Journalist do not hold any responsibility or liability for the same.
"Growth Support Without Inflation Fallout Is RBI’s Tightrope"... Read more
