Moody’s Forecasts India’s GDP Growth to Exceed 6.5% in 2025-26

Growth of India's GDP is anticipated to be in excess of 6.5% in fiscal 2025-26 owing to rising government capital spending, boosted consumption caused by the cutting of income tax rates, and Reserve Bank of India's cut in interest rates, says Moody's in its latest report.

The report emphasizes that while it faced a transient slowdown midway in 2024, the Indian economy has poised itself among the fastest-moving big economies across the world with improved growth drivers in place.

"Government capital spending, tax reductions on middle-class income groups to support consumption, and monetary relaxation will cause India's real GDP growth to surpass 6.5 per cent in fiscal 2025-26 from 6.3 per cent in fiscal 2024-25," said Moody's Ratings.

Moody's also foresees a reduction in India's inflation rate to 4.5% in 2025-26 from 4.8% last year. This easing in inflation is likely to provide space for a more accommodative monetary policy, allowing lower interest rates and higher liquidity in the banking system, facilitating lending to businesses and consumers.

After the recent monetary policy assessment, RBI Governor Sanjay Malhotra made a 25-basis-point cut, lowering the key rate to 6.25%.

"We expect additional rate reductions to be restrained, as the central bank holds back in face of global uncertainty surrounding US trade policy, together with related market and exchange rate volatility, reflected in a rebound in the value of the US dollar against emerging market currencies later in 2024 and through early 2025," Moody's said.

Though the report has a steady forecast for banking, it does admit possible stress in small business lending, microfinance loans, and unsecured retail loans. Banks, though, are likely to be profitable enough, with any decline in net interest margins (NIMs) because of rate cuts likely to be limited.

We anticipate system-wide loan growth to decelerate to 11-13 per cent in fiscal 2025-26 from an average of 17 per cent for March 2022-March 2024 as banks will attempt to maintain loan growth in parallel with deposit expansion," the report further said.