India’s real Gross Domestic Product (GDP) growth is expected to surpass 6.5 pc in the financial year 2025-26, driven by increased government capital expenditure, tax reductions, and monetary easing, according to Moody’s latest Banking System Outlook – India report released on Wednesday.
The report suggests that India’s economy is on track for a recovery following a cyclical slowdown.
The Union Budget for 2025-26, presented by Finance Minister Nirmala Sitharaman, introduced significant tax relief under the new tax regime, exempting incomes up to ₹12 lakh from taxation. These measures are anticipated to stimulate consumption and contribute to broader economic expansion.
Moody’s forecasts India’s GDP growth to accelerate to over 6.5 pc in FY26, up from 6.3 pc in FY25. The Finance Ministry’s Economic Survey has projected GDP growth in the range of 6.3 pc to 6.8 pc for the next financial year, with official estimates indicating a 6.5 pc growth rate for the current year.
India’s GDP growth had slowed to 5.6 pc in the July-September quarter of 2024 but rebounded to 6.2 pc in the subsequent quarter. The report attributes this improvement to increased government expenditure, private consumption, and policy measures designed to support economic recovery.
Stable Outlook for Banking Sector
Moody’s has maintained a stable outlook for India’s banking sector, stating that while the operating environment will remain favourable, there may be slight deterioration in asset quality following significant improvements in recent years.
The report highlights potential stress in unsecured retail loans, microfinance, and small business loans.
Despite these concerns, Indian banks are expected to maintain adequate profitability. Moody’s noted that while net interest margins (NIMs) may see a marginal decline due to modest rate cuts, overall financial stability will be sustained.
Loan growth across the banking sector is predicted to moderate to 11-13 pc in FY26, compared to an average of 17 pc between March 2022 and March 2024. Banks are expected to align their loan growth with deposit expansion to ensure liquidity remains stable.
Inflation and Monetary Policy Outlook
Moody’s has projected a decline in India’s average inflation rate to 4.5 pc in FY26, down from 4.8 pc in the previous fiscal year. Inflation had been a key concern for the Reserve Bank of India (RBI), which raised its policy rate by 250 basis points between May 2022 and February 2023 to curb price pressures.
In February 2025, the RBI lowered its policy rate by 25 basis points to 6.25 pc, citing stabilising inflation. Moody’s expects further rate cuts to be implemented cautiously, considering uncertainties in the global economic environment.
The report also highlights potential risks stemming from global trade policies, particularly shifts in U.S. trade regulations and currency market fluctuations.
It warns that a stronger U.S. dollar against emerging market currencies, as seen in late 2024 and early 2025, could prompt the RBI to adopt a conservative stance on further monetary easing.
“As reflected by the strengthening of the U.S. dollar against emerging market currencies in late 2024 and early 2025, the RBI is likely to approach further rate cuts cautiously,” Moody’s stated in its report.
Government’s Role in Economic Expansion
The report emphasises the role of public expenditure in driving India’s economic growth. Increased investments in infrastructure, road development, and energy projects are expected to boost capital formation and create employment opportunities.
The government’s fiscal policies, including incentives for manufacturing and exports, are anticipated to provide additional support to economic expansion.