India story intact despite Moody’s downward growth projections

Moody’s Ratings has lowered India’s economic growth outlook for 2025 to 6.3 per cent from its earlier projection of 6.5 per cent growth. In 2024, the economic expansion was 6.7 per cent. Adjustment by Moody’s is the result of a variety of factors, global as well as domestic, including India-Pakistan tensions and policy uncertainties that are dampening investor and consumer sentiment. A key concern flagged in the latest Global Macro Outlook-May Update by Moody’s is the escalating strains in Indo-Pak ties. Although India continues to show resilience, regional conflicts add an element of unpredictability that can weigh heavily on business and economic decisions. Additionally, broader geopolitical disruptions, particularly the ongoing trade and strategic friction between the United States and China, are exerting a downward pull against global trade flows, investment patterns, and supply chains. Moody’s noted that these factors are likely to impact all G20 economies, including India, by way of disrupting global demand and dampening financial market activity. India’s integration into the global economy means it is not immune to these external shocks.

The trimmed growth forecast for 2025 coincides with similar downward revisions by other key international institutions. Both IMF and the World Bank have recently cut their estimates for India’s and the world’s economic growth, citing a complex mix of slowing demand, inflation concerns, and geopolitical instability. However, there is room for optimism beyond the short-term dip. Moody’s expects Indian economy to bounce back in 2026 with a projected growth rate of 6.5 per cent. This suggests that while short-term volatility remains, India’s long-term fundamentals—driven by a large domestic market, ongoing digital transformation, and structural reforms—remain robust. The IMF’s April World Economic Outlook offers another bright spot in India’s economic narrative. According to the report, India is set to overtake Japan to become the world’s fourth-largest economy by nominal GDP this year. The IMF projects India’s GDP at current prices to reach approximately $4.187 trillion, narrowly surpassing Japan’s forecast of $4.186 trillion.

This milestone would place India behind only the United States ($30.5 trillion), China ($19.2 trillion) and Germany ($4.7 trillion), highlighting the country’s rising influence in the global economic order. The monetary policy is expected to play a supportive role in maintaining economic momentum. The Reserve Bank of India (RBI) has already initiated a rate-easing cycle, cutting the key repo rate by 25 basis points in two consecutive reviews, bringing it down to 6 per cent. With inflation showing signs of moderation and growth slowing, further rate cuts are anticipated. These steps are aimed at lowering borrowing costs, boosting investment, and stimulating consumption. Yet, businesses and investors face a challenging environment marked by higher operating costs and increased risk premiums. Moody’s emphasised that as companies reassess their global supply chains and capital allocation strategies considering new geopolitical realities, there may be hesitancy in committing to long-term investments. This could particularly affect sectors dependent on FDI inflows and international trade. Despite the temporary slowdown, the India story remains intact. With demographic advantages, improving infrastructure, and a vibrant services sector, the story can become more cheerful if manufacturing also becomes strong. The challenge for the policymakers will be to navigate short-term headwinds while maintaining the momentum of reforms and infrastructure development that underpin sustainable growth.