India's GDP growth to exceed 6.5% in FY2025-26 on govt spending, tax cuts: Moody's

India's economy will grow by more than 6.5% in the fiscal year starting April 2025, up from 6.3% this year, Moody's Ratings said on Wednesday, buoyed by increased government spending, tax cuts, and lower interest rates fueling consumption.

The forecast positions India as one of the fastest-growing major economies globally as Moody's expects a rebound after a temporary slowdown in mid-2024.

The growth had slowed to 5.6% in the July-September quarter of 2024, a slight upward revision from the earlier estimate of 5.4%, but still lower than the 8.1% expansion recorded in the same period a year earlier. However, it rebounded to 6.2% in the subsequent three months.

"Government capital expenditure, tax cuts for middle-class income groups to boost consumption and monetary easing will help India's real GDP growth exceed 6.5% for fiscal 2025-26 from 6.3% in fiscal 2024-25," Moody's Ratings said.

The Economic Survey 2024-25, tabled in Parliament by finance minister Nirmala Sitharaman on January 31, has projected GDP growth for the next fiscal at 6.3-6.8%.

Moody's expects inflation to ease to 4.5% in fiscal 2025-26 from 4.8% this year.

The Reserve Bank of India (RBI) aggressively raised its benchmark lending rate by 250 basis points from May 2022 to February 2023 to tame inflation. Last month, the central bank cut the repo rate by 25 basis points to 6.25%.

"We expect further rate cuts to be modest, as the central bank takes a cautious stance amid global uncertainty around US trade policies, as well as associated market and exchange rate volatility, as represented by a strengthening of the US dollar against emerging market currencies in late 2024 and early 2025," Moody's said.

“We expect system-wide loan growth to slow to 11-13 per cent in fiscal 2025-26 from an average of 17 per cent for March 2022-March 2024 as banks seek to keep loan growth in tandem with deposit expansion,” it added.

Despite recent improvements, Moody's cautioned that the operating environment for Indian banks, while favourable, will see moderate asset quality deterioration in the coming year.