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Indian Economy Continues to Face External Headwinds; Cooling Inflation Clears Path for Further Rate Cuts to Support Recovery

  • 29 May 2025
  • Post Views: 2298

Despite easing in US-China trade tensions, persistent uncertainty and tariff volatility continue to cloud the global economic outlook. India’s economic recovery remained steady in Q4 FY25, with real GDP growth estimated at 6.9% YoY, buoyed by robust agriculture and resilient services, partly offset by subdued industrial activity. For FY26, we revise real GDP growth projection down by 20-bps to 6.2%, reflecting weak external demand, cautious private investment, and elevated uncertainty, partially offset by a strong rural demand and supportive policy. Rural demand is expected to lead the consumption recovery in FY26, while urban consumption may see moderate gains. Private investment outlook remains subdued, necessitating continued government spending. Inflation has dropped sharply, opening up policy space for further rate cuts. The RBI is expected to cut the policy repo rate by an additional 75-bps in FY26, bringing the terminal policy repo rate to 5.25% by October. Systemic liquidity is expected to remain ample, supporting effective policy transmission.