India faces a challenging 2025; growth is slowing, the rupee looks set to tumble against the greenback, and headline inflation is far from the midpoint of the central bank’s target range, according to Moody’s Analytics
“Overall, India is facing a bumpy road in 2025. A weakening rupee, declining foreign investment, and volatile inflation are the areas of greatest economic risk. Changes in fiscal and monetary policy, likely in the first half of the year, are needed if India is to achieve 6.4% growth,” Aditi Raman, Associate Economist, Moody’s Analytics, said
The slowdown versus 2023 sets a cautious tone for 2025. With interest rates staying higher for longer, domestic demand will moderate. Potential U.S. tariffs on Indian imports will make for a challenging export environment that hampers growth, it said, adding, “However, that won’t be too influential, given India’s relatively closed economy. Our baseline has GDP growth slowing to 6.4% in 2025.”
Losing steam
While India had one of the fastest-growing economies in Asia in 2024, GDP growth waned over the first three quarters. In the September quarter, growth slowed to 5.4% year on year from 6.7% in the previous quarter. This was the weakest result since the last quarter of 2022 and far below market expectations. Persistently high inflation, particularly for food, curtailed domestic demand. Meanwhile, elevated interest rates stied households and businesses.
Heavier-than-expected rainfall during the monsoon season and a slump in government expenditure in the lead-up to the general election in mid-2024 exacerbated the slowdown. The end of last year went better. GDP growth likely picked up in the December quarter, resulting in an overall expansion of 6.8% in 2024. That compares with
7.8% in 2023.
The rupee’s rough run
The rupee has weakened significantly since the start of the U.S. Federal Reserve’s easing cycle in September. Donald Trump’s win in the U.S. presidential race only put more pressure on the rupee as investors sold Indian assets, jumping on a greenback rally.
The Reserve Bank of India (RBI) announced steps to add liquidity to the banking system, including buying government bonds worth Rs 60,000 crore and conducting a USD/INR swap auction of $5 billion. The liquidity deficit in India’s banking system reached a one-year peak recently. RBI will continue to monitor and adjust measures as necessary.
Despite interventions by the Reserve Bank of India, the rupee lost more ground in the opening weeks of 2025, hitting a record low of INR86.6 to the U.S. dollar in mid-January.Although the rupee hasn’t weakened as much as some other developing economies currencies, we expect it to keep depreciating over the long term as a growing middle class increases the country’s reliance on imports. The central bank will be hard-pressed to offset that pressure on the currency.
Rate cuts hinge on the stability of headline inflation
The RBI‘s monetary policy position has loosened ever so slightly. In October, its Monetary Policy Committee changed its stance to ‘neutral’ from ‘withdrawal of accommodation’.
And in December, the committee relaxed interest rate ceilings on certain deposits to boost capital inflows.
“That said, the RBI has not applied its foot on the main brakes; the repo rate has sat at 6.5% for close to two years, having climbed 250 basis points from May 2022 to February 2023.
Aggregate loan growth at six of the country’s largest banks, both private and state-owned, is projected to decelerate to 12.3% in the fiscal year ending March 2025, down from 22.5% in the previous year.
Initially, the market expected rate cuts to align with global movements, particularly with cuts in the U.S. and the euro zone. That was quickly squashed in October when inflation breached the ceiling of the RBI’s 2% to 6% target range for the first time in fourteen months. While inflationary pressures softened on improving crop yields in the final months of 2024, prices are still not where the central bank needs them. Headline inflation stood at 5.2% in December, far from the RBI’s long-held 4% target.
