Moody’s Ratings surprised few by cutting India’s real GDP growth forecast for the 2025 calendar year to 6.3 percent, down from its prior 6.5 percent projection. The announcement, made on May 6, 2025, comes against a backdrop of intensifying policy uncertainty in the United States—mainly over tariffs and trade restrictions—and mounting geopolitical stresses worldwide. While Moody’s left its 2026 forecast unchanged at 6.5 percent, the downward revision underscores how external headwinds could temper India’s otherwise robust expansion.

Global Policy Uncertainty Weighs on Outlook

In its latest Global Macro Outlook update, Moody’s highlighted that heightened U.S. policy unpredictability—ranging from abrupt tariff announcements to evolving enforcement of existing levies—has unsettled markets and dampened trade flows. With the U.S. still grappling with tariff tensions from the Trump administration era, and no clear roadmap for scaling back duties, supply‑chain managers and corporate treasurers remain on edge. Many multinationals, wary of sudden cost spikes on key inputs, have delayed investment and ramped up inventory buffers, which in turn slows order books for Indian exporters.

Although some tariffs affecting consumer goods have been paused or marginally rolled back, the overall environment remains one of ‘expect the unexpected.’ Moody’s observes that investors now price in maximum tariff rates as the base case—raising import costs and, in many instances, prompting buyers to shift sourcing to alternative markets where possible. For India, this has translated into greater volatility in export volumes for textiles, auto parts, and machinery, which form a significant slice of the country’s outbound shipments.

Geopolitical Risks Add to Downside Pressures

Beyond trade policy, Moody’s flagged renewed tensions between India and Pakistan, particularly after a tragic terrorist attack in late April in the Kashmir region that claimed civilian lives. Heightened security concerns around the Line of Control have led some foreign investors to revisit risk assessments for projects in sensitive border states. In addition, flashpoints in the South China Sea and persistent conflicts in Eastern Europe and the Middle East contribute to a climate where cross‑border commerce faces non‑economic obstacles—from insurance premium spikes for shipping routes to cautious corporate risk‑management protocols.

These geopolitical configurations carry a cost: businesses factoring in potential disruptions often delay capital expenditures or reroute shipments along longer, less efficient corridors. In Moody’s baseline scenario, any widening of regional hostilities could shave an additional 0.1 to 0.2 percentage points off India’s growth next year.

Domestic Fundamentals Remain Solid

Crucially, Moody’s acknowledges that India’s domestic engine remains powerful. After achieving 6.7 percent expansion in 2024—fuelled by resilient consumer demand and a manufacturing rebound—India is on track to become the world’s fourth‑largest economy in nominal terms this year, overtaking Japan. Strong agricultural output, supported by an above‑normal monsoon forecast, has buoyed rural incomes and lifted household consumption. Meanwhile, urban spending on automobiles, electronics, and services continues apace, underpinning broad‑based growth.

Retail inflation eased to 3.3 percent in March—its lowest level in over five years—driven by softening food prices, particularly vegetables and pulses. Core inflation, excluding volatile food and energy, held near historic lows despite some upward pressure on housing and transport costs. With overall price pressures remaining well within the central bank’s target band, the Reserve Bank of India (RBI) has room to dial up monetary support.

RBI’s Accommodative Stance and Liquidity Measures

In April, India’s Monetary Policy Committee delivered its second consecutive rate cut of the year, trimming the repo rate by 25 basis points to a decade‑low 6 percent and describing its stance as “accommodative.” To ensure that these cuts translate into lower borrowing costs, the RBI has purchased government bonds worth over 6 trillion rupees ($70 billion) year‑to‑date, reducing short‑term interest rates in the interbank market. A pledged bond‑buying programme of 1.25 trillion rupees in May aims to keep durable liquidity at around 1 percent of deposits, further pressing down funding costs.

Looking ahead, an RBI external committee member recently suggested cautious—but steady—additional rate easing, provided inflation remains subdued. With headline inflation forecast to stay near 4 percent for the remainder of 2025, markets widely anticipate another one or two quarter‑point cuts later in the year.

Comparative Outlook from Other Institutions

Moody’s revision sits alongside similar adjustments from other global agencies. The International Monetary Fund trimmed its India forecast for fiscal year 2025 to 6.2 percent, citing trade‑policy jitters and financial‑market volatility. S&P Global Ratings also nudged down its outlook, forecasting growth of 6.3 percent in 2025–26. Yet these projections still place India ahead of nearly every other major economy, with global growth expected to hover around 2.8 percent this year.

Balancing Act: Exports, Investment, Consumption

External demand remains the key wildcard. Merchandise exports grew by a modest 3 percent year‑on‑year through April, reflecting softness in global orders for textiles, gems and jewellery, and chemical products. Services exports—particularly IT‑enabled services—continue to perform more strongly, up around 9 percent, as companies outsource software development and back‑office work amid persistent cybersecurity and digital‑transformation mandates.

On the domestic front, corporate investment signals have brightened. Capital‑goods production has rebounded, and infrastructure spend under India’s ambitious National Infrastructure Pipeline is on track to exceed 10 trillion rupees this fiscal year. Government budgets for roads, rail networks, and urban‑mass transport have grown by over 15 percent, providing a multiplier effect across cement, steel, and machine‑tool segments.

Rising household incomes and sustained hiring in formal sectors—driven by renewed recruitment in manufacturing and logistics—support robust consumer demand. Auto sales remain near record highs, and two‑wheeler registrations have surged in tier‑2 and tier‑3 cities, reflecting a continued shift toward personal mobility.

U.S. Monetary Policy and Trade Dynamics

Across the Pacific, the U.S. Federal Reserve has held its benchmark federal‑funds rate in a 4.25–4.50 percent corridor since December, balancing tariff‑induced inflation risks against signs of a manufacturing slowdown. After three rate cuts in late 2024, no further easing is expected until definitive data show inflation sustainably back at Fed targets. The Fed’s approach to trade policy—and any scaling back of existing tariffs—will materially affect global trade patterns, with direct spillovers into India’s exports and supply chains.

Tariffs on Chinese electronics and machinery have indirectly benefited Indian firms competing for U.S. market share. Yet, lingering uncertainty over the continuation or removal of duties means businesses often hedge by delaying investment decisions or diversifying sourcing to Southeast Asia, Latin America, or Eastern Europe. Such shifts can take months, slowing the usual up‑and‑down cycles of export orders that have characterized India’s trade performance in recent years.

Geopolitical Headwinds and Investor Sentiment

Investor confidence has also been rattled by fresh flare‑ups along India’s border with Pakistan and simmering tensions in the South China Sea. Following the tragic attack on tourists in Pahalgam in late April—attributed to cross‑border militants—foreign insurers temporarily raised premiums for projects in Jammu & Kashmir, marginally increasing project costs for energy and infrastructure developers. Though these premiums have since normalized, the risk that further skirmishes could disrupt lives and livelihoods remains an overhang on investor sentiment.

Global funds have taken note: foreign portfolio inflows into Indian equities have slowed in recent weeks, although net flows remain positive year‑to‑date. Many fund managers cite India’s long‑term growth story and favorable demographics but temper allocations on concerns over policy mimicry—such as retrospective tax claims—and regulatory shifts in finance or tech sectors.

Outlook: Modest Rebound After Mid‑Year

Moody’s baseline anticipates a modest rebound in the second half of 2025. As global trade tensions ease—Moody’s assumes peak effective U.S. tariff rates will decline by late 2025—Indian exporters could see improved order pipelines. Simultaneously, domestic demand is expected to strengthen with scheduled further rate reductions by the RBI and the full rollout of various production‑linked incentive schemes across pharmaceuticals, electronics, and green‑energy sectors.

A benign monsoon, stable food prices, and robust government capex should underpin rural and urban consumption. If these factors materialize, India could deliver second‑half growth close to 7 percent, lifting the full‑year average in line with Moody’s adjusted forecast.

Key Risks to the Forecast

Trade‑policy escalation: Any re‑introduction or widening of U.S. tariffs beyond current levels could delay export recovery further.

Financial market volatility: Sudden bouts of risk aversion in equity or credit markets could raise India’s cost of capital, constraining corporate financing.

Fiscal slippage: Should India’s public debt ratio continue rising—projected to near 90 percent of GDP by 2027—the government may need to rein in spending, dampening capex and social outlays.

Geopolitical flare‑ups: Renewed conflict on the India‑Pakistan frontier, or broader regional escalations, could trigger insurance premium spikes and deter foreign direct investment.

Conclusion

While Moody’s revised 6.3 percent forecast for India in 2025 marks a downward tweak, it still reflects an expansion rate well above global peers. The adjustment captures the reality of a world in flux—where trade policies, currency swings, and geopolitical fault lines increasingly shape economic outcomes. Yet India’s underlying strengths—demographic dividend, digital‑services boom, infrastructure push, and monetary support—provide a sturdy foundation. If external uncertainties ease and domestic reforms stay on course, India’s economy could well surpass expectations, reinforcing its position as a bright spot in an otherwise sluggish global landscape.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

6th May, 2025