Is India heading into a financial crisis that no one is telling us yet?

Fresh from mopping up as much as nearly 144 billion dollars from Indians abroad as well as a bank interest rate hike, you would have thought the Reserve Bank of India (RBI) would take it easy. But India’s central bank seems to be doing exactly the opposite — it is imposing restrictions on forex trading, as well as opening dollar purchase options for oil companies to directly purchase crude oil. All the while wildly selling dollars in the open market to ensure that the rupee’s value doesn’t drop further.

Why is all this happening? Is India heading into some sort of new crisis that the authorities are keeping mum about.

Yes, we know things have not been too great since March, when Trump and Iran got on their on-again, off-again missile-laden love-hate story. The direct impact was on oil-importing countries like India and China, with a double whammy hitting New Delhi — a terrible balance of payment abyss gawking at it on the financial side, and a shortage of life-propelling oil and gas on the commercial side. It even led to PM Modi exhorting the nation to tighten its loins, including suggestions like stopping gold purchases and foreign trips.

As the Hormuz crisis waxed and waned, India walked a delicate tight rope in geo-strategy, while RBI did the hard lifting by selling dollars to prop up the Indian currency, which at one point veered dangerously close to the psychologically damaging 100 rupee (to one dollar) mark.

While RBI’s interventions, as well as the stabilisation of oil prices (it actually fell from a peak of $138 after the start of the war to $71 by July over the past couple of months) had made most of us believe that the worst was behind us, fresh clouds have blown in, very apparently in recent days.

Much publicised, besides oil shooting up again to 104 as of Tuesday night, has been India’s food inflation at nearly 8 per cent last month, and an unfortunate situation of retail inflation in rural areas going above 6 per cent — even as in cities and towns, it remained less than 5 per cent. With the monsoon season over and officially declared as bad, that means upcoming crop seasons will be in jeopardy, unless the government pulls a rabbit out of its hat and arrange irrigation supplies to all farmers. If not? Food prices go even up, even as rural distress deepens.

But not so equally talked about, are the other reasons that puts India’s financial position in a rather delicate position. As the world’s investors started chasing AI, foreign investment into the country has trickled out. And this couldn’t have come at a worse time — Trump tightening the screws on India on the trade front (including threats over buying Russian oil), the outgo of even more dollars to buy even less oil, and the subsequent drop in the value of the rupee which is like a domino effect going on to impact everything else.

Now top it with rural unease due to a bad monsoon, and all that it means in the coming months!

“Rupee cannot be stabilised easily unless we reduce our widened trade deficits. Given the falling rupee, the dependence on oil and other necessary commodity imports can worsen the situation further,” explains Rupamanjari Sinha Ray, associate professor: economics, public policy& legal management at MDI Gurgaon, “Country was dependent on foreign institutional and portfolio investments (FIIs and FPIs), which are volatile and now getting withdrawn.”

What can India do? Ray has suggestions: “Three things — reduce dependence on oil imports and focus on alternative energy; redirect trade direction towards BRICS plus countries with a focus on dollar; and attract more FDI from other countries and NRIs, particularly for AI industry, sustainable energy industry and semiconductors.”

Adding to India’s bottomline worries are also its high rates of debt. The country’s debt is now at about 83% or so of its total GDP, higher than the recommended 60%.

Central government’s debt alone is now above 200 lakh crore. While it isn’t as much a worry as it could be for a smaller nation — India’s vibrant domestic economy and the fact that much of the borrowing is internal, is reassuring. But it does mean that a good chunk of the government’s revenue — 40 per cent if one estimate is to be believed, goes into interest payments alone, while it could have been better put to use for infra and welfare measures during such a testing time even as the clouds build up. Not to forget, that nagging feeling that a storm is about to break in the horizon.