As the global economy continues to grapple with geopolitical tensions and financial market volatility, India stands at a critical juncture in its growth story. DBS Bank‘s latest report offers a nuanced perspective on the challenges and opportunities awaiting the Indian economy in 2025. While the outlook remains optimistic, the report, authored by Radhika Rao Senior Economist, DBS Bank and Philip Wee, Senior FX Strategist, DBS Group, highlights both structural strengths and cyclical headwinds.
Trump 2.0 and its implications for India
One of the key global factors influencing India’s outlook is the potential return of Donald Trump to the U.S. presidency. DBS Bank notes that heightened U.S.-China tensions under Trump 2.0 could lead to increased financial market volatility, impacting global and Indian markets alike.“The first line of impact will be passthrough of financial market volatility, with sharp swings in U.S. Treasury yields and the dollar likely to pile pressure on Indian assets and flows,” the report states. While India’s rupee has recently hit new lows, the currency’s relatively low sensitivity to U.S. Treasury moves provides some insulation.
DBS Bank also underscores India’s strategic advantages in such a scenario. With deeper export and investment linkages to the U.S. than China, India stands to benefit from its strong trade ties. “The U.S. is India’s largest goods and services export destination, followed by the EU,” the report adds. Furthermore, India’s strengths in sectors like agriculture, chemicals, and textiles could help it maintain robust trade with the U.S.
However, challenges persist. Trade skirmishes, such as those experienced during Trump’s first term, could resurface. Moreover, restrictive U.S. immigration policies could weigh on India’s vital services sector.
India’s domestic growth drivers and headwinds
India’s growth is expected to moderate to a more sustainable pace of 6.0% in FY25 and FY26, down from 8.2% in FY24. DBS attributes this slowdown to sticky inflation, tight financing conditions, and election-related delays in public spending.
The rural sector is showing signs of recovery, but urban demand has softened. The report highlights factors such as slower consumer-related loans and weaker automobile sales, which have weighed on urban consumption. Additionally, regulatory actions and adverse weather conditions, including heatwaves and unseasonal rains, have impacted economic output.
Inflation and monetary policy
Inflation remains a concern, driven by supply-side disruptions such as unseasonal rains and higher import taxes on key commodities. DBS Bank expects inflation to average 4.7% in FY25, moderating further to 4.1% in FY26.
“The food basket continues to disrupt the disinflation process, validating the central bank’s caution over rate cuts,” the report notes. However, the Reserve Bank of India (RBI) is likely to start easing rates in February 2025, with a projected cumulative cut of 75 basis points by the year’s end.
Fiscal landscape and public spending
India’s fiscal consolidation remains on track, with the central government targeting a fiscal deficit of 4.9% of GDP for FY25. Public capital expenditure, which was subdued in the first half of the fiscal year, is expected to pick up pace in the second half.
“Centre’s capex disbursements will need to more than double in the next five months to meet the annual INR 11.1 trillion target,” DBS notes. This increased spending is critical for boosting growth in sectors like construction and materials and encouraging private sector investment.
Long-term outlook: India’s resilience
Despite these cyclical challenges, India’s medium-term growth prospects remain strong. The nation is on track to become the world’s third-largest economy within the next five years, behind the U.S. and China.
DBS expects India’s real GDP growth to stabilize around 6.5% to 6.6% in the medium term, supported by investments in infrastructure, digitalization, and high-value sectors like semiconductors. Additionally, steady macroeconomic indicators, including a sub-2% current account deficit and record-high foreign reserves, provide a strong foundation.
