India’s economy is bracing for a slowdown in 2025, primarily driven by persistent inflationary pressures and a moderation in domestic demand, said Moody’s in its latest report. The Reserve Bank of India (RBI) is caught in a trilemma, needing to balance growth, inflation, and currency stability. As higher interest rates persist, they are expected to dampen private consumption and investment in the initial months of the year. Market watchers anticipate a potential easing of monetary policy starting in April 2025. The rupee has weakened dramatically, reaching an all-time low of 86.6 against the US dollar in mid-January 2025, exacerbating the economic challenges.Â
Moody’s analysis said India’s GDP growth has already shown signs of deceleration, with the September quarter of 2024 recording a year-on-year growth of 5.4 per cent, down from 6.7 per cent in the previous quarter. This decline marks the weakest performance since late 2022, largely due to stubbornly high inflation and elevated interest rates that have curtailed domestic demand.Â
Moreover, unexpected heavy rainfall and reduced government spending ahead of the mid-2024 general elections have further slowed economic momentum, it said. The Union Budget, to be presented on February 1, 2025, for the fiscal year ending March 2026, will focus on boosting domestic demand and reducing the fiscal deficit. Analysts expect the budget to emphasise investment while maintaining fiscal prudence. The government would aim for a fiscal deficit of less than 4.5 per cent of GDP by the end of the fiscal year, down from 5.6 per cent in the previous year. This focus on domestic demand is crucial, given the challenges posed by potential US tariffs on Indian imports, which could further strain the export environment.Â
Headline inflation ended 2024 at 5.2 per cent, above the RBI’s target range, complicating the central bank’s monetary policy decisions. The RBI’s cautious approach has seen the key policy rate remain at 6.5 per cent for nearly two years. Despite some easing in December 2024, rate cuts are contingent upon achieving greater stability in headline inflation, which is expected to cool to 4.7 per cent in 2025.Â
The RBI’s shift to a neutral stance in October and the subsequent easing of interest rate ceilings on certain deposits in December are part of efforts to bolster capital inflows amidst a depreciating rupee.
Looking ahead, India’s economic outlook remains challenging, as it aims to achieve a GDP growth of 6.4 per cent in 2025. The weakening rupee, declining foreign investment, and volatile inflation continue to pose significant risks.