India's GDP growth to surpass 6.5 per cent in 2025-26: Moody's

The report states that following a temporary slowdown in mid-2024, India's economic growth is expected to accelerate and register one of the fastest rates among the world's large economies.

"Government capital expenditure, tax cuts for middle-class income groups to boost consumption and monetary easing will help India's real GDP growth exceed 6.5 per cent for fiscal 2025-26 from 6.3 per cent in fiscal 2024-25," Moody's Ratings said.

Moody's expects India's average inflation rate to decline to 4.5 per cent in fiscal 2025-26 from 4.8 per cent in the previous year this is expected to provide adequate headroom a soft monetary policy to spur growth through lower interest rates more liquidity in the banking system for loans to consumers and businesses.

The RBI Governor Sanjay Malhotra announced a 25 basis points rate cut to 6.25 per cent after the monetary policy review last month.

"We expect further rate cuts to be modest, as the central bank takes a cautious stance amid global uncertainty around US trade policies, as well as associated market and exchange rate volatility, as represented by a strengthening of the US dollar against emerging market currencies in late 2024 and early 2025," Moody's said.

The report projects a stable outlook for the banking sector, but states there may be some stress in unsecured retail loans, microfinance loans and small business loans. However, the profitability of banks will remain adequate as declines in net interest margins (NIMs) are likely to be marginal amid modest rate cuts, it added.

"We expect system-wide loan growth to slow to 11-13 per cent in fiscal 2025-26 from an average of 17 per cent for March 2022-March 2024 as banks seek to keep loan growth in tandem with deposit expansion," the Moody's report added.