For the Indian economy, 2025 was all about fighting many macroeconomic baddies.
While key indicators like exports and currency depreciation had the country in a chokehold, a robust growth rate of 8% in the first half of the fiscal was like a gift from a higher power.
We survived external and domestic setbacks such as US tariffs that threw markets and trade into turmoil, uneven private investment, unemployment, dips in manufacturing and mining activity, weak domestic demand, and above all, a fragmenting global economy reshaped by wars, and changing supply-chain dynamics.
On balance, the Indian economy coursed through the currents with a serenity that would have done a wise man proud.
Growth
India remains the fastest-growing Asian economy, with the IMF raising its forecast to 6.7%-6.9% for FY26 and 6.5%-6.9% in FY27. The recent personal income tax reductions, an accommodative monetary policy, ongoing GST reforms, and a possible trade deal with the US are expected to lift both hearts and hopes in the coming quarters.
While the headline numbers appear wholesome, growth is not broad-based as it should be. Private consumption and investments need a turnaround and economists warn that growth could slow in the second half owing to a high base effect, the impact of US tariffs and softening global demand.
Sectorally too, while the agricultural sector is holding promise, industrial output needs to be better. Manufacturing and mining activity particularly must gain pace, which in turn can create jobs and attract investments.
As the IMF noted, private investments remain uneven and sluggish, while growth is being fuelled by government investment, which has surged 40% so far this fiscal. In fact, the Indian economy's endless wait for the private investment cycle to kickstart is much like Titanic's enduring romance against the odds.
Both the IMF and RBI insist that manufacturing, construction and public capital expenditure act as key growth drivers, while government infrastructure spending, and investments in sectors such as electronics, automobiles and renewables can rebalance from consumption-led growth to investment-led expansion.
But private capex is stuck at 12% of GDP for over a decade. Of the total investments, private capex's share fell to 34.4% in FY24, the lowest since FY12. Government data also shows that new private capex investment intentions for FY26 stood at Rs 4.89 lakh crore, down 26% over the previous year.
Likewise, as the RBI survey shows, capacity utilisation in the manufacturing sector is struggling to break past 75%. In the 53 quarters since the start of 2012-13, capacity utilisation exceeded 75% on just 10 occasions.
What we actually need is all-round performance of key components including agriculture, industry and services on the supply-side and private consumption, investments, public expenditure and exports on the expenditure side. Put another way, it's like the Infinity Stones in Avengers films. Only when all the Stones are fully powered does the user get complete control to rule the universe.
Rupee's descent
The Indian currency is behaving as though it's mounted on a Ferris wheel that's spinning uncontrollably.
It started the year at 85.64 and took just 15 trading sessions to cross 91, owing to trade tensions, and persistent capital outflows. As if falling to fresh historic lows, and emerging as Asia's worst-performing currency isn't enough, the domestic unit is expected to touch 92 in next three months.
Worse, the rupee's weakness is not limited to the US dollar alone. It has slipped against other major currencies as well. The Nominal Effective Exchange Rate (NEER), or the weighted average of the rupee's exchange rate against 40 key trading partners, fell about 8% as of October. Likewise, the Real Effective Exchange Rate (REER), which adjusts NEER to inflation, too fell nearly 9.9%, indicating that the rupee's depreciation is not just a nominal adjustment but an erosion of purchasing power.
The key reason for the fall in the rupee is not India's current account deficit (CAD), which is behaving rather obediently. Until there's a reversal of foreign capital outflows, the rupee may continue to plumb lower depths.
That said, the current decline cannot be compared with the 2013 episode, when the domestic currency survived one of the toughest phases, according to Kotak Securities. As investors rushed out of emerging markets, India was hit the hardest because our economy was already weak and placed in the Fragile Five, inflation was high, CAD stood at 4.8% of GDP and India was heavily dependent on foreign flows to finance the deficit.
The rupee lost almost 20% of its value, import costs surged, bond yields spiked, and markets turned nervous. Real rates were low, and consumption-led growth had led to a high trade deficit. When the dollar liquidity tap was shut during the taper tantrum, the impact was severe.
According to Kotak, the situation is different this time. Real rates are competitive, growth is robust, inflation is under control, reserves are strong, and services exports cushion the impact on the economy. And as the IMF noted, India's currency system is crawl-like, where the rupee is allowed to move in small, gradual steps, without sharp shocks.
The RBI's pragmatic interventions are akin to screw-tightening, and not to defend a particular level. Often, countries face trouble when they run out of dollars. Given India has sufficient dollar cover, the rupee, even at 90, is seen as adjusting rather than collapsing.
Trade deal
When trade talks began early this year, a pact with Washington seemed like a matter of time. It was billed as a 'big deal', and so on, but time proved that you can't always believe what you hear.
With India refusing to toe the Trump line to lay a welcome mat for US imports, particularly agri products, besides reducing reliance on cheap Russian oil, the country's exports are facing a steep tariff of 50%. This is among the highest levies globally, compared with an effective tariff of about 16% on Asean economies.
The tariffs came into effect in August. Subsequently, India's exports to the US fell nearly 12% in September and 8.5% in October, though they rebounded sharply in November, rising 22.6%. On balance, India's exports to the US are up 10.1% till October, driven largely by substantial front-loading of shipments when tariffs were lower. However, sectors such as gems and jewellery, textiles, apparel, agriculture, impacted by tariffs recorded a 34% y-o-y decline. If a trade agreement is not reached, these pressures may further weigh on the CAD, noted SBI Research.
The good news is, brokerages and consulting firms expect the India-US trade deal to be concluded in the next six months. If it happens, it's as good as gaining a thousand soldiers and horses during a battle.
Jobs
While India has seen strong economic growth, and liberalisation, unemployment remains a key policy concern. According to the Economic Survey 2023-24, India must create 7.85 million non-farm jobs annually till 2030 to keep pace with its growing workforce. Private forecasts peg the need for at least another 10 million jobs every year in the formal sector.
The unemployment rate fell from 6% in 2017-18 to 3.2% in 2023-24. While 1.56 crore women have joined the formal workforce in the past seven years, youth unemployment rate fell from 17.8% to 10.2% between 2017-18 and 2023-24, below the global average of 13.3% as per the ILO's World Employment and Social Outlook 2024.
Sectoral trends from the April-June 2025 quarter reveal that agriculture remains dominant in rural areas, employing 44.6% of men and 70.9% of women, while the tertiary sector leads in urban employment with 60.6% of men and 64.9% of women. Overall, 56.4 crore people aged 15 and above were employed during this quarter, comprising 39.7 crore men and 16.7 crore women.
As one of the fastest-growing economies, India is poised to supply nearly two-thirds of new workforce entrants globally in the coming years, as per the World Economic Forum's Future of Jobs Report 2025.
Inflation and interest rates
If there's one thing to be chipper and upbeat about, it's softening inflation and interest rates. Interestingly, the path for both rates and prices remains decidedly downward.
Retail inflation fell to a record-low of 0.25% in October -- the sharpest correction in recent times. In fact, for the first time since the start of the Flexible Inflation Targeting regime, average headline inflation registered 1.7% in Q2, breaching the lower tolerance threshold of 2%. While Q3 print is estimated at 0.6%, which perhaps could be another all-time low, Q4 inflation will likely rise to 2.9%.
As for rates, RBI reduced the repo rate four times in just nine months from 6.5% to 5.25%, with Governor Sanjay Malhotra pointing to a rare Goldilocks phase -- benign inflation at 2.2% alongside 8% growth in the first half of the fiscal year -- keeping the economy going.
IPO boom-FPI outflows
Notwithstanding global macroeconomic uncertainties and domestic challenges, fresh public offerings in India are in the middle of engineering their own Tom Cruise stunt, defying physical limits.
Between October 2024 and September 2025, 86 IPOs raised nearly Rs 1.71 lakh crore, almost double the previous year, while the Sensex and Nifty delivered barely single-digit returns.
On the other hand, Foreign Portfolio Investors (FPIs) are exiting in truckloads, having withdrawn a record $18.5 billion in Indian equities so far in 2025. Global investors have been bearish on India for most part of 2025, with net outflows of over $10 billion across investment classes so far this year, data from securities depository NSDL shows.
Stock markets view the FPI exodus as an undignified spectacle. Nifty underperformed many Asian peers with roughly 4-6% gains in 2025, even as domestic investors provided ample support, while major indices went from optimism to underperformance. While large caps retained their poise with 8-9% gains, mid caps were under pressure delivering barely 1%, while small-caps saw a 9% decline.
It's unclear if FPIs will make a comeback on their own. However, a mutually-beneficial trade deal with the US and better economic output has the potential to turn bad guys into good guys in a sequel, ie, in 2026.
Exports
India's goods and services exports are, perhaps, driving home the point that they won't be diminished by bullet wounds or beat-downs.
As data released by the Ministry of Commerce & Industry show, during April-November, total exports stood at $562.13 billion, 5.43% higher than $533.16 billion recorded during the same period a year ago. Merchandise exports rose from $284.60 billion to $292 billion in the first eight months of 2025-26.
However, goods exports are expected to be hit in the second half of the current fiscal, owing to steep US tariffs and weak global demand. In fact, exports to the US, while still growing 13% y-o-y to $45 billion, showed signs of slowdown in September, with shipments declining around 12% compared to the previous year. Worse, the situation is unlikely to get any better next year, despite a push for free trade deals with multiple countries.
Still, goods and services exports are likely to grow by 3% to $850 billion this fiscal, according to think tank GTRI. It, however, warned that exports will face a tougher road in 2026. Particularly, goods exports will likely stay flat, while services exports may inch past $400 billion, lifting total exports.
At $850 billion, they fall short of the government's target of $1 trillion, despite the push for free trade deals with multiple countries. That said, services exports are witnessing robust growth and will likely offset merchandise-trade headwinds.
RBI
2025 was a turning point for India's banking system as the RBI simplified regulation, unlocked bank balance sheets, and restored confidence in credit-led growth. Under Governor Malhotra, the central bank tossed some 80 circulars into the trashcan to free up bank balance sheets and revive credit growth. Indian banks are now better governed, better capitalised, and are even capable of absorbing shocks without causing a systemic collapse.
Interestingly, the RBI reportedly consolidated 3,809 circulars into updated master directions and scrapped another 5,673 obsolete circulars, significantly easing compliance for banks and financial institutions. Besides, liquidity coverage ratio norms were relaxed, external commercial borrowing rules liberalised, M&A financing norms eased, giving companies greater access to capital.
Lastly, after an endless wait, RBI granted banking licences to AU Small Finance Bank and Fino Payments Bank, besides allowing foreign banks like Japan's SMBC to invest in Yes Bank and Emirates NBD to acquire a stake in RBL Bank.
In short, the RBI is no longer fighting a rearguard action, but is laying the ground for the next credit cycle to take off.