India's Economic Resilience Amidst Global Trade Tensions

Fitch Ratings has recently highlighted India's economic resilience, forecasting a robust GDP growth of 6.5% in the fiscal year 2025-26 (FY26), despite potential challenges posed by US tariff policies. The report underscores India's low reliance on external demand as a key factor insulating its economy from the adverse effects of aggressive US trade policies.

Drivers of Growth

Economic growth in India rebounded to 6.2% in the fourth quarter of 2024, up from 5.4% in the previous quarter, driven by increased private and public expenditure, including investment spending. The agricultural sector has also shown strength, benefiting from favorable monsoon conditions that have enhanced kharif crop yields.

Future Outlook

Fitch expects India's GDP growth to strengthen further in the first quarter of 2025, aligning with its projection of 6.3% growth for the fiscal year ending March 31, 2025. Corporate sentiment remains optimistic, with banking surveys indicating sustained double-digit expansion in private sector credit. The Union Budget's commitment to substantial public infrastructure investment, coupled with reduced capital costs, supports Fitch's forecast of increased investment activity for FY25-26 and FY26-27.

Consumer Sentiment and Inflation

While consumer sentiment has shown a slight decline recently, accompanied by a notable reduction in automobile purchases, declining inflation rates are expected to enhance real income levels. Employment indicators from official sources and PMI surveys suggest steady job creation and workforce participation growth. Additionally, the budget's revisions to tax-free allowances and tax brackets will increase disposable incomes, sustaining consumer expenditure, albeit at a more modest pace than the current year.

Monetary Policy Adjustments

The RBI initiated monetary easing in early February, reducing the repo rate by 25bp to 6.25%. Two additional policy rate reductions are anticipated this calendar year, with the rate projected to reach 5.75% by December 2025, adjusted downward from the previous GEO's forecast of 6.25%.