Moody's Forecasts India's GDP Growth to Surpass 6.5% in FY26, Positioning It Among the Fastest-Growing Major Economies

India’s Economic Growth Set to Surpass 6.5% in FY26, Moody’s Reports

India is gearing up for a promising economic future, with projections indicating that the country’s growth will exceed 6.5% in the fiscal year 2025-26. According to Moody’s Ratings, this surge will be fueled by increased government capital expenditure and a boost in consumer spending. The outlook suggests a significant rebound from the current fiscal year, where growth is expected to hover around 6.3%.

Factors Driving Growth

Moody’s highlighted several key elements contributing to this optimistic forecast:

Government Investments: Enhanced capital expenditure from the government is expected to play a pivotal role in stimulating economic activity.
Tax Relief for Middle-Class: Tax cuts aimed at middle-income groups will likely increase disposable income and drive consumption.
Monetary Policy Adjustments: A shift towards monetary easing will further bolster India’s economic expansion.

The agency emphasized that, despite a temporary slowdown in 2024, India is on track to be one of the fastest-growing major economies.

Banking Sector Stability

The banking sector is projected to maintain stability, according to Moody’s analysis. The operating conditions for Indian banks are expected to remain favorable, although some challenges may arise:

Asset Quality Concerns: A moderate decline in asset quality is anticipated, particularly in sectors such as unsecured retail loans and microfinance.
Profitability Outlook: Despite expected declines in net interest margins (NIMs), the overall profitability of banks should remain adequate.

Government’s Economic Projections

The Finance Ministry’s Economic Survey has projected India’s GDP growth for the upcoming fiscal year at 6.3% to 6.8%. In contrast, the current fiscal year is anticipated to achieve a 6.5% growth rate. This reflects a rebound in real GDP growth, which dipped to 5.6% in the third quarter of 2024 before rising to 6.2% in the subsequent quarter.

Inflation and Interest Rate Trends

Moody’s forecasts a decrease in India’s average inflation rate to 4.5% for the fiscal year 2025-26, down from 4.8% the previous year. The Reserve Bank of India (RBI) has been proactive in managing inflation, having raised its policy rate significantly from May 2022 to February 2023. A recent cut in February 2025 to 6.25% signals a cautious approach amid global uncertainties.

Future Loan Growth Expectations

Looking ahead, Moody’s anticipates a slowdown in system-wide loan growth, projecting rates of 11-13% for fiscal 2025-26, down from an average of 17% from March 2022 to March 2024. This adjustment reflects banks’ efforts to align loan growth with deposit expansion, ensuring sustainable financial health.

In conclusion, as India prepares for fiscal 2025-26, the combination of government initiatives, consumer spending, and cautious monetary policy is poised to drive robust economic growth, positioning the country as a key player in the global economy.