India’s economy will likely slow in 2025 amid strong inflationary pressures and moderating domestic demand as interest rates stay higher for longer, according to a research note by Moody’s Analytics.
Potential U.S. tariffs on Indian imports will make for a challenging export environment that hampers growth, writes Aditi Raman, associate economist, Moody’s Analytics. However, that won’t be too influential, given India’s relatively closed economy, Raman adds.
Higher-for-longer interest rates will weigh on private consumption and investment in the rest half of the year, Raman says, adding that monetary policy will ease from April at the earliest.
Moody’s Analytics expects a 25-basis point rate cut in April. “The central bank faces an age-old trilemma as growth, prices and the currency all sit in the risky territory; the cure for one stands to inflame another. Although the September quarter’s growth reading came in below expectations, the RBI will not want to fan depreciation by beginning its easing cycle too early.”
Moody’s Analytics expects the Indian rupee to keep depreciating over the long term as a growing middle class increases the country’s reliance on imports. “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,” Raman.
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, notes Raman. Despite interventions by the Reserve Bank of India, the rupee lost more ground in the opening weeks of 2025, hitting a record low of 86.6 to the U.S. dollar in mid-January.
Moody’s Analytics expects inflation to cool to 4.7% in 2025 from 4.8% in 2024. “Food inflation should ease, but the tumbling rupee will likely add to input costs, driving up imported inflation. Currency weakness may also delay rate cuts,” it cautions.
“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,” says Raman.
“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,” the research says.
Even though 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, says Moody’s Analytics.
Raman, however, says 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 research firm expects the upcoming budget to supports domestic demand, particularly investment, while aiming for a fiscal deficit of less than 4.5% of GDP by the end of the financial year 2025-26. In the year to March 2024, the fiscal deficit was 5.6% of GDP.
