India’s Economic Outlook and Monetary Policy in 2025
India’s inflation rate remains below the Reserve Bank of India’s (RBI) 4 per cent target in 2025. The Finance Ministry’s June Economic Review projects inflation will undershoot the 3.7 per cent forecast for the fiscal year 2025-26 (FY26). This creates scope for the RBI to continue easing monetary policy. The Monetary Policy Committee (MPC) is set to meet in August 2025 amid expectations of further interest rate cuts to support growth.
Inflation and Monetary Policy Easing
Inflation trends are subdued, especially core inflation. The RBI has already cut interest rates by 100 basis points between February and June 2025. This easing aims to boost economic growth. With inflation comfortably low, the MPC may sustain or deepen rate cuts. Lower borrowing costs could stimulate demand and investment.
Credit Growth and Investment Concerns
Credit growth by scheduled commercial banks slowed to 10.4 per cent in June 2025 from 13.9 per cent a year earlier. Despite easier monetary conditions and strong bank balance sheets, credit uptake remains cautious. This slowdown reflects risk-averse lenders and hesitant borrowers. Private investment appetite is weak, limiting economic acceleration.
Shift to Bond Markets
Corporates increasingly prefer bond markets, especially commercial papers, due to lower costs compared to bank loans. This trend may reduce traditional credit demand. The government encourages firms to leverage schemes like the Employment Linked Incentive to boost capital expenditure. Reviving private investment is crucial for sustained growth.
External Risks and Export Challenges
Global economic slowdown, especially in the US, poses downside risks. Uncertainty over US tariffs could affect India’s export performance in coming quarters. This external environment may dampen demand for Indian goods and services abroad. The trade outlook remains cautious amid geopolitical and economic uncertainties.
Domestic Economic Resilience
Despite challenges, India’s economy shows resilience in supply and demand fundamentals. The first quarter of FY26 ended on a firm note with monsoon rains supporting agriculture. Economic activity measured in constant prices appears healthier than nominal figures suggest. The economy is described as steady as she goes for FY26.
Foreign Investment Trends
Foreign direct investment (FDI) and foreign portfolio investment (FPI) inflows fell in FY25 but show signs of recovery in FY26. Gross FDI grew 5 per cent year-on-year in April-May 2025, reaching $15.9 billion. Improved equity inflows and fewer repatriations signal renewed investor confidence. Key sectors attracting investment include digital infrastructure and manufacturing.
Medium-Term Strategic Shifts
India faces strategic challenges amid global supply chain shifts in semiconductors, rare earths, and magnets. The country aims to strengthen its position in these critical sectors. This requires policy focus and investment to capture emerging opportunities in global technology and manufacturing landscapes.
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