
Mumbai: The economic engine is headed for a downshift in 2025 amidst strong inflationary pressure, moderating domestic demand, a plummeting rupee that increases the debt servicing burden on corporates and government, and higher for longer interest rates. This will have the economy printing in a low 6.4% growth in calendar year 2025, stated global rating and analytics agency Moody's Analytics.
From an initially-projected 7.2% growth in FY25, the Reserve Bank has reduced it by a steep 60 bps to 6.6%, after the second quarter surprised with a seven quarter low GDP print of 5.4%.
“India faces a challenging 2025 with growth is slowing, the rupee tumbling, and the headline inflation still remaining far from the midpoint of the central bank's target range. All this will drive the economy onto a hump this year and growth is likely to print in at 6.4% in 2025," said Aditi Raman, an associate economist at Moody's Analytics, on Wednesday.
Along with all these is a higher-for-longer interest rates that weighs on private consumption and investment in the first half of the 2025 and the earliest monetary policy easing is not before April, she said, adding the RBI faces a classic trilemma of balancing growth, containing inflation and containing the bleeding rupee.
She expects the budget, slated for Saturday, to be more prudent on the fiscal side more than supporting growth. She attributes the lower growth projection to the slowdown in the first three quarters of 2024. While the economy grew 6.7% in the June quarter it lose the steam and grew at a 5.4% in the September quarter—the weakest print since the last quarter of 2022 and far below market expectations.
While persistently high inflation, particularly of food items, curtailed domestic demand, elevated interest rates stifled households and businesses. Heavier-than-expected monsoons and a slump in government spending due to the hustings in April-May 2024 only exacerbated the slowdown.
While interest rates staying higher for longer will moderate demand, potential US tariffs on Indian goods will make for a challenging export environment.
On the rupee, which has been bleeding since October last, she said the local unit has been weakening since the start of the US Federal Reserve's easing cycle that began in September and got exacerbated since Donald Trump's poll win in November and hit a low of 86.7 early January.
Even though the rupee hasn't weakened as much as some other developing economies' currencies, she expects 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.
She expects inflation to cool to 4.7% in 2025 from 4.8% in 2024 yet not good enough for sharp rate cuts. While for overall retail inflation to ease, food inflation should ease, and a tumbling rupee will likely add to input costs, driving up imported inflation.
Currency weakness may also delay rate cuts. All these has left the Reserve Bank in an age-old typical trilemma as growth, prices and the currency all sit in risky territory and the cure for one stands to inflame the other. While recent budgets have underlined the need for fiscal prudence, the real economy is calling for more attention now.
We expect a budget that supports domestic demand, particularly investment, while aiming for a fiscal deficit of less than 4.5% for next fiscal, down from 4.8% this fiscal and 5.6% in FY24.
Overall, the country is facing a bumpy road in 2025—a weakening rupee, declining foreign investments, and volatile inflation are the areas of greatest economic risks. Changes in fiscal and monetary policies, likely in the first half of the year, are needed if the country was to achieve even 6.4% growth, she concludes.