On Tuesday, Moody's downgraded India's growth estimate for 2025 from 6.5% to 6.3%. The agency attributed this to slowing down of the world economy on account of rising policy uncertainty in the US and protectionism in the form of trade barriers.
In its May edition of the Global Macro Outlook for 2025-26, Moody's referenced geopolitical tensions like the current India-Pakistan disputes as possible threats to its growth assumptions.
The agency cautioned that companies and investors may incur additional costs because they would need to factor in changing geopolitical dynamics while structuring their investment and sourcing strategies.
Moody's now estimates India's GDP growth at 6.3% in 2025 but retains its 6.5% estimate for 2026. This is marginally lower than the growth rate of 6.7% anticipated in 2024. The report also indicates that the Reserve Bank of India can cut benchmark policy rates further to spur growth.
Moody's attributed the slowdown in global economy prior to the revision to the fact that growth was already going to slow down to its potential level during the current year. Moody's revised global growth estimates for 2025 and 2026 on the back of more drastic policy changes and more uncertainty than initially anticipated, especially in China and the US.
The report also recommended that such policy uncertainty also will continue to weigh on consumer, business, and financial activity. Although some tariffs have been reduced and suspended, persistent trade tensions, especially between the US and China, are expected to curtail global trade and investment, with spillovers for the G-20 economies.
In its updated projection, Moody's reduced the US GDP growth to 1% in 2025 and 1.5% in 2026, from the earlier 2% and 1.8%. This is below a 2024 growth of 2.8%.
For China, growth will decelerate to 3.8% in 2025 and 3.9% in 2026, from 5% growth anticipated in 2024.
Moody's also went on to say that the US trade policy is in suspense. While China laid on significant tariffs and prohibitions, the majority of the other leading trading partners have not hit back at the same level. Moody's opines that the US is at peak effective tariff rates and decreases are expected in the short term.
Aside from uncertainties in trade, Moody's base case projections also factor in regional political tensions and volatility in the financial markets. The agency indicated that in April, financial markets registered an increased risk aversion and re-pricing of financial instruments. Such volatility, which reduces liquidity and the cost of capital, has the potential to weaken the economy's resilience as well as impair growth further.
Geopolitics are also a source of downside risk to Moody's projections. New tensions in South Asia between India and Pakistan, and in the South China Sea between China and the Philippines, are joined by the continuing wars in Russia, Ukraine, and the Middle East.
On April 22, a terrorist attack in Pahalgam, Jammu & Kashmir, killed 26 tourists, which also increased tensions in the region. India has identified five militants, three of them Pakistanis, and vowed to take action against the attackers.
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