Deficit will drown surplus.

"Moody's Ratings...slashed India's GDP growth forecast for the year by 0.8% to 6% on subdued private consumption, capital formation and industrial activity amid higher energy costs." "For calendar year 2027, Moody's slashed GDP growth estimates by 0.5% to 6% for India." ET.  Already, "Petrol and diesel prices were hiked by Rs 3 per liter yesterday after state run oil companies faced mounting losses due to a sharp rise in global crude oil prices." "India's retail inflation rose marginally to 3.8% in April, driven by dearer food prices, government data showed." "Annual inflation remains below the central bank's 4% target," as "Food inflation was at 4.2% in April, compared with 3.87% in March." Reuters. However, "India's wholesale inflation unexpectedly accelerated to 8.3% in April, its fastest pace in three-and-a-half years, as surging energy costs triggered by the Middle East conflict pushed up fuel and manufacturing prices across the economy, government data showed." ET. Wholesale prices will feed into retail prices with a lag. But, oil prices are not surging that much. Brent crude is at $109.3 per barrel this morning. oilprice.com. It was much higher in 2008, 2011-14, and 2022-24. eia.gov. What has really changed is the Indian rupee, which has crashed. It was about 49 to one dollar in 2008, at 55-60 per dollar from 2011-14 and at 81-83 to one dollar from 2022-24. Thomas Cook. One dollar buys Rs 95.99 this morning. xe.com. This is not wholly because of the Iran conflict, the rupee has been falling for some time. That is because the RBI has been printing money to finance government spending. "The Reserve Bank of India (RBI) balance sheet shows that the amount of government paper (including treasury bills) held as on 28 February was Rs 21.34 trillion. It was Rs 15.58 trillion in March 2025." "The increase so far of Rs 5.76 trillion in RBI holdings of government paper is remarkable. An increase of this scale has never been witnessed earlier," wrote Madan Sabnavis. It means that the RBI is buying up government debt by printing rupees, or financing its deficit, as was the practice earlier. "As part of the 1991 reforms, the government and RBI decided to stop this financing arrangement." "In 1997, the government and RBI signed an agreement that stopped this practice of deficit financing." The India Forum. This year's budget estimates the deficit between government revenue and spending to be Rs 15.69 trillion. prs.india.org. Is that a gross underestimate? The Asian Development Bank reports that "The Union government spent Rs 6.33 trillion on subsidies and transfers in 2023-24," but "the official figures undercount actual subsidy expenditure by about Rs 3 trillion at the state level alone; dozens of schemes, pensions, loan wavers, investment promotion subsidies and electricity shortfalls are simply not classified as subsidies," wrote Aditya Sinha. Every year the RBI transfers its surplus to the government. In recent years it has been transferring record amounts. It transferred Rs 1.02 trillion in 2023-24 and Rs 2.11 trillion 2024-25. panplexa.com. Last year it paid another record of Rs 2.69 trillion. HDFC. This year the government expects Rs 3.16 trillion, another record. ET. It is hard to believe that the RBI is making so much profits every year. However, it has the authority to print as many rupees it requires. Foreigners are not waiting. "Net outflow by foreign portfolio investors (FPIs) from the stock market for the current year crossed the Rs 2-trillion mark for the first time ever." TOI. As they repatriate in foreign currency the rupee falls in value. To protect the rupee, the RBI has been selling dollars in the spot market as well as in the unseen non-deliverable forward (NDF) market. "The RBI's short dollar book is close to $100 billion across offshore and onshore markets. A bulk of it is in the NDF market, where the central bank has ramped up its intervention in the last few weeks." Linked.in. Appointing obedient officials to help in raiding the central bank may look easy but there will be a price to pay. At some point the RBI will run short. And the rupee will collapse. What then?