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India should alter fiscal, monetary policies to achieve 6.4% growth in 2025: Moody’s
India faces daunting challenge as growth slows, rupee weakens, and headline inflation slips out of RBI's target range
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India should alter its fiscal and monetary policies to achieve a 6.4% growth in gross domestic product (GDP) this year amid declining foreign investment, volatile inflation, and a weak rupee, Moody’s Analytics said on Wednesday.
Moody’s said that while India was one of the fastest-growing economies in Asia in 2024, GDP growth waned over the first three quarters and is likely to pick up in the December quarter, leading to an overall expansion of 6.8% in 2024 against 7.8% in 2023.
“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,” Moody’s Analytics associate economist Aditi Raman said.
The analytics firm said it expects the budget that will be presented on Saturday to support domestic demand and investment, while also targeting a fiscal deficit for the next fiscal year of under 4.5% of GDP.
In FY24, the fiscal deficit was 5.6% of GDP, and is expected to decline to 4.9% this fiscal.
The Reserve Bank of India (RBI) is expected to grapple with three challenges: managing growth, inflation, and currency stability while navigating the global economic landscape, it said.
“The slowdown versus 2023 sets a cautious tone for 2025, with interest rates staying higher for long, domestic demand will moderate,” Raman said.
“Potential US tariffs on Indian imports will make for challenging export environment that hampers growth. However, that won’t be too influential, given India’s relatively closed economy. Our baseline has GDP growth slowing to 6.4% in 2025,” she added.
Moody’s Analytics said the Indian rupee has weakened significantly since the start of the US Federal Reserve’s easing cycle in September.
With Donald Trump returning to power in the US, investors sold Indian assets to take advantage of the rally in the greenback.
Despite interventions by the Indian central bank, the rupee continued its slide in January, hitting a record low of 86.6 to the US dollar in mid-January.
The rupee has not depreciated against other developing countries’ domestic currencies.
The rupee is expected to continue its decline against the dollar over the long-term as the growing middle-class increases the country’s reliance on imports, Raman said, adding : “The Reserve Bank will be hard pressed to offset that pressure on the currency.”
Moody’s Analytics expects inflation to cool off to 4.7% in 2025 from 4.8% in 2024.
Food inflation will likely cool off, but the fall in the rupee against the dollar will likely add to input costs, driving up imported inflation, it pointed out.
“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,” Raman added.