India remains one of the most stable emerging markets, benefiting from strong structural growth, a stable political environment, and manageable external pressures. However, short-term economic challenges—including a cyclical slowdown, trade uncertainties, and inflationary risks—have prompted fiscal and monetary policy adjustments to support growth.
Despite near-term pressures, GDP growth is projected to average 6.6% in 2025, driven by government-led consumption stimulus and monetary easing. In this article, we explore India’s economic outlook, key risks, and investment implications for the year ahead.
1. Rising Country Risk Premium Amid Economic Pressures
India’s Country Risk Premium increased to 283 basis points in Q4 2024, reflecting:
- Deteriorating economic and financial risk ratings (+4.8 points since Q3 2023), reaching the highest level since mid-2019.
- Rising global risk aversion, leading to capital outflows.
- Weakening exchange rate and payment risk ratings, signaling lower macro-financial resilience.
Despite this, India remains relatively well-positioned compared to other emerging markets:
- India’s risk premium (283bp) remains below the EM average (467bp) and key EM benchmark (346bp).
- Low external debt and large forex reserves continue to provide stability.
- Effective policy management helps mitigate financial shocks.
2. Growth Momentum Slows Due to Cyclical and Structural Factors
India’s economy lost momentum in late 2024, with GDP growth slowing to 5.4% y/y in Q3 2024, down from 8.6% in Q4 2023. This was due to:
Overall, India’s growth outlook remains positive but constrained by both cyclical and structural headwinds.
- Weak manufacturing output, particularly in electricity and steel.
- Slower services sector growth, affecting job creation and demand.
- Tighter monetary policy, restricting domestic consumption.
- Reduced government spending, leading to a decline in imports.
- High food prices, particularly in rural areas, affecting household consumption.
- Stable policy rates since April 2023, limiting capital expenditure.
- Uncertain global trade conditions, discouraging new business investment.
Overall, India’s growth outlook remains positive but constrained by both cyclical and structural headwinds.
3. Fiscal Stimulus to Support Consumption and Investment
To counter slowing domestic demand, the Indian government announced a fiscal stimulus package in its February 2025 budget:
These measures are expected to revive consumption and business sentiment without compromising India’s fiscal sustainability.
- Personal income tax cuts, boosting household consumption.
- Public investment acceleration, marking the fourth consecutive year of expansion.
- Gradual fiscal consolidation, with the fiscal deficit expected to decline to -4.4% of GDP in FY 2025-26, down from -4.8% in FY 2024-25.
- A shift toward debt reduction, moving away from fiscal deficit targeting.
These measures are expected to revive consumption and business sentiment without compromising India’s fiscal sustainability.
4. Monetary Easing to Improve Liquidity and Investment
The Reserve Bank of India (RBI) cut its repo rate by 25 basis points (to 6.25%) in February 2025, signaling a shift toward monetary easing as inflation risks moderate.
- Inflation is expected to ease toward the RBI’s 4% target (±2%) in 2025.
- Further rate cuts of 50-75 basis points are likely over the year.
- Incremental liquidity measures will support credit growth, including:
- A cut in the Cash Reserve Ratio (CRR) to inject liquidity.
- Increased open market operations and secondary market debt purchases.
- Reduced forex interventions, allowing greater currency flexibility.
These actions should boost private investment and help offset weaker external demand.
5. Indian Rupee Faces Pressure Amid Global Uncertainty
The Indian Rupee (INR) depreciated by 4% against the USD since November 2024, reaching USD/INR 87.6 in early February 2025. Key factors driving the currency weakness include:
Despite these pressures, India’s large forex reserves and strong economic fundamentals should help limit excessive currency volatility in 2025.
- Rising portfolio outflows, as investors shift capital to the U.S. amid global uncertainty.
- The RBI’s reduced forex interventions, allowing greater exchange rate flexibility.
- Persistent trade uncertainties, especially under a possible second Trump administration.
Despite these pressures, India’s large forex reserves and strong economic fundamentals should help limit excessive currency volatility in 2025.
6. Market Reactions: Stock Market Correction, Resilient Bond Yields
Stock Market Performance
Overall, financial markets remain cautious but fundamentally stable, benefiting from strong policy measures and investor confidence in India’s long-term growth potential.
- The Indian benchmark index dropped by 3,000 points over nine sessions, with total losses of 10,000 points since September 2024.
- The decline reflects investor caution amid policy shifts and global uncertainties.
- Government bond yields remained stable at 6.7%-6.9% since August 2024.
- Stability was supported by:
- Improved market liquidity from RBI easing.
- India’s inclusion in global bond indices (JPMorgan and Bloomberg in 2024, with FTSE Russell expected in September 2025).
- Foreign investor demand for Indian debt, despite currency risks.
Overall, financial markets remain cautious but fundamentally stable, benefiting from strong policy measures and investor confidence in India’s long-term growth potential.
7. Investment and Business Implications for 2025
Opportunities for Investors
- Strong macroeconomic fundamentals make India an attractive investment destination.
- Government-led fiscal stimulus will support domestic consumption and infrastructure.
- RBI’s easing policy is expected to boost liquidity and private investment.
Key Risks to Monitor
- Global trade uncertainty could weigh on exports and investment sentiment.
- Continued INR depreciation may deter foreign capital inflows.
- Inflation volatility remains a risk, particularly if global commodity prices rise.
Conclusion: India’s Economic Trajectory for 2025
India’s economy is navigating a cyclical slowdown but remains well-positioned for stable growth in 2025, supported by:
While currency and inflation risks persist, India’s policy framework remains robust, making it a key investment destination in emerging markets.
- Fiscal and monetary policy interventions to sustain demand.
- Moderate but resilient GDP growth (~6.6% in 2025).
- Macroeconomic stability, with low external debt and strong forex reserves.
While currency and inflation risks persist, India’s policy framework remains robust, making it a key investment destination in emerging markets.
