India’s economic growth is set to exceed 6.5% in the fiscal year 2025-26, driven by increased government spending, tax cuts, and lower interest rates, according to a recent report by Moody’s Ratings.
Strong Recovery After Temporary Slowdown
The report highlights that after a temporary slowdown in mid-2024, India’s economy is expected to pick up momentum. The growth rate is projected to be one of the fastest among major economies worldwide.
Moody’s attributes this acceleration to key factors such as:
- Higher government capital expenditure
- Tax cuts for middle-income groups, leading to increased consumer spending
- Easing of monetary policy, making borrowing cheaper for businesses and individuals
As a result, India’s real GDP growth is expected to rise from 6.3% in 2024-25 to over 6.5% in 2025-26.
Inflation to Ease, Supporting Growth
Moody’s also expects inflation to decline to 4.5% in 2025-26, down from 4.8% in 2024-25. Lower inflation will allow the Reserve Bank of India (RBI) to maintain a soft monetary policy, which will:
- Reduce interest rates
- Increase liquidity in the banking system
- Encourage lending to businesses and consumers
In line with this approach, RBI Governor Sanjay Malhotra recently announced a 25 basis points rate cut, bringing the repo rate down to 6.25%.
Cautious Approach to Further Rate Cuts
Despite the recent cut, Moody’s predicts that further reductions in interest rates will be limited. The RBI is likely to remain cautious due to global economic uncertainty, including:
- Potential changes in U.S. trade policies
- Market fluctuations and currency volatility, with the U.S. dollar strengthening against emerging market currencies in late 2024 and early 2025
Stable Banking Sector with Some Risks
The Moody’s report projects stability in India’s banking sector but warns of potential stress in:
- Unsecured retail loans
- Microfinance loans
- Small business loans
However, it notes that banks will continue to be profitable, as the impact of lower interest rates on margins will be limited.
Additionally, loan growth in India’s banking system is expected to slow down to 11-13% in 2025-26, compared to an average 17% growth between March 2022 and March 2024. This moderation is due to banks focusing on balancing loan growth with deposit expansion.
Conclusion
India’s economy is on track for strong growth in 2025-26, supported by government policies, consumer spending, and a favorable monetary environment. While challenges like global uncertainties and retail loan stress remain, the overall outlook remains positive, positioning India among the fastest-growing major economies.
