Daily Voice: RBI measures can support rupee but cannot reverse its decline on its own, says Lotusdew Wealth’s Prachi Deuskar

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The Reserve Bank of India’s (RBI) interventions can curb excessive volatility and discourage speculative pressure but a sustained appreciation of the rupee would require an improvement in underlying fundamentals, including moderating oil prices, stronger capital flows and greater global risk appetite, said Prachi Deuskar, co-founder of Lotusdew Wealth and Investment Advisors in an interview with Moneycontrol.

Deuskar noted that monetary tightening can support the rupee but cannot, on its own, reverse its decline if the underlying causes are widening external imbalances or sustained capital outflows.

Meanwhile, amid elevated energy prices, monetary tightening and global uncertainty, GDP growth exceeding 7.1 percent is plausible but not highly probable, the smallcase manager said.

Do you think a sustained recovery in equity markets is unlikely until oil prices begin to cool?

Cooling oil prices would certainly help, but they are not the only driver of a potential market recovery. A sustained rise in Brent crude increases the import bill, puts pressure on the rupee, and raises inflation risks. That can hurt corporate margins and constrain monetary policy.

However, oil prices alone will not determine the market’s direction. Stronger corporate earnings or a revival in foreign institutional flows could support recovery. India's domestic growth fundamentals remain relatively resilient. The recovery may initially be selective, favouring companies with strong pricing power, healthy balance sheets and sustainable earnings growth. Volatility is likely to remain elevated till global headwinds abate.

Is there a strong possibility that FY27 GDP growth could surpass even the RBI’s forecast?

The RBI has raised its FY27 GDP growth forecast to 7.1 percent from 6.7 percent, reflecting stronger economic momentum. Q1 GDP growth of 7.8 percent has been encouraging. If momentum sustains in the second half of the year, FY27 growth could surpass the revised forecast.

However, a lot of factors, such as domestic consumption, infrastructure investment and resilient services activity, have to come together to deliver a positive surprise. The monsoon and its impact on rural consumption will also be important. Given the context of elevated energy prices, monetary tightening, and global uncertainty, I would consider growth above 7.1 percent plausible, but not very probable.

Do you think economic growth will remain resilient even if the RBI raises interest rates by another 25–50 basis points?

The RBI raised the repo rate by 25 basis points to 5.50 percent on October 7, marking its first hike since February 2023. It also shifted its policy stance from neutral to calibrated tightening.

An additional 25-basis-point hike would probably have a manageable impact on aggregate growth, given the economy's underlying momentum. However, a further 50-basis-point increase would put pressure, particularly on interest-sensitive sectors such as real estate, automobiles, and leveraged businesses. But if inflation remains elevated, the cost of not acting could ultimately be greater than the near-term growth sacrifice.

What are your expectations for the Q2 earnings season? Could corporate earnings be significantly better than in Q1?

I expect Q2 earnings to remain healthy, although performance will remain uneven across sectors. Banks and financial services, automobiles, and select energy companies could deliver relatively strong results, supported by domestic demand and sector-specific tailwinds.

Conversely, higher input costs may pressure margins in consumption-oriented and manufacturing businesses. Global uncertainty could constrain IT services. I would focus less on whether Q2 is broadly better than Q1 and more on the quality of earnings, margin sustainability, and management guidance. Strong headline growth will matter less if it is concentrated in a few companies or driven by temporary factors.

Do you expect oil prices to remain elevated throughout the current fiscal year?

A lot will depend on the duration and intensity of geopolitical tensions. Supply disruptions and uncertainty around West Asian energy flows are likely to keep prices elevated in the near term.

For India, that means higher import costs, difficult inflation management and pressure on the rupee. But beyond the near term, rather than persistently rising prices, I would expect continued volatility, with a possibility of lower prices if supply disruptions ease.

Do you think the RBI’s measures are unlikely to bring significant stability to the rupee?

The RBI's interventions can reduce excessive volatility and discourage speculative pressure, as demonstrated by the rupee's recent recovery. However, sustained movement in the rupee’s favour requires improvement in underlying fundamentals – moderating oil prices, improved capital flows and greater global risk appetite.

Monetary tightening can support the rupee, but it cannot independently reverse the decline caused by a widening external imbalance or sustained capital outflows.

Could global uncertainties pose a major risk to India’s growth momentum and keep oil prices elevated?

Yes. Global uncertainty remains one of the principal risks to India's economic outlook. Geopolitical tensions in West Asia are particularly important for India because disruptions to shipping routes or energy infrastructure can push up crude prices and freight costs.

Higher energy prices can then feed into domestic inflation, weaken the rupee, and squeeze corporate margins. Global interest rate decisions and changes in foreign investment flows can add to the pressure on financial markets.

India's strong domestic demand and policy capacity provide some protection against these factors, but the convergence of several headwinds remains a key risk.