India’s GDP To Grow Over 6.5% In FY26, Says Moody’s

India’s economy is set to expand beyond 6.5% in the financial year 2025-26, driven by increased government spending and a rise in consumption, according to Moody’s Ratings. This would place India among the fastest-growing major economies globally.

Following a brief slowdown in 2024, the economy is expected to gain momentum, surpassing the estimated 6.3% growth for the current fiscal year. Moody’s attributes this improvement to factors such as higher capital expenditure by the government, tax relief for middle-income groups, and a gradual reduction in interest rates, all of which will boost economic activity.

Stable Banking Sector Despite Slight Asset Quality Decline

Moody’s also offered a stable outlook for India’s banking sector in the upcoming fiscal year. While the overall business environment for banks is expected to remain favorable, there may be a slight deterioration in asset quality. This is primarily due to stress in areas like unsecured retail loans, microfinance lending, and small business loans, following several years of strong improvements.

However, banks’ profitability is likely to remain steady. The decline in net interest margins (NIMs) is expected to be minimal, as interest rate cuts are projected to be moderate.

Interest Rates and Loan Growth Trends

The Reserve Bank of India (RBI) had raised interest rates by 250 basis points between May 2022 and February 2023 to control inflation. Although rate cuts are expected moving forward, Moody’s believes they will be gradual. The central bank is likely to remain cautious due to uncertainties in global trade policies, fluctuations in financial markets, and the impact of a stronger US dollar on emerging economies.

On the banking front, overall loan growth across the system is predicted to slow down to 11-13% in FY26. This marks a shift from the rapid expansion of around 17% seen between March 2022 and March 2024. Banks are expected to balance lending growth with deposit availability, ensuring financial stability.

Official Estimates and Inflation Outlook

The Indian government’s Economic Survey has forecast GDP growth between 6.3% and 6.8% for the next fiscal year. Official figures indicate that the economy will grow by 6.5% in the current fiscal year.

After a dip to 5.6% in the July-September 2024 quarter, economic growth rebounded to 6.2% in the subsequent quarter. Meanwhile, inflation is expected to ease, with Moody’s projecting a decline to 4.5% in FY26 from 4.8% in the previous year.