Page 25 - Policy Economic Report_Mar'25

POLICY AND ECONOMIC REPORT
OIL & GAS MARKET

Short-Term Growth

? FY 2025 GDP growth – Expected at 6.3%
? FY 2026 GDP growth – Expected at 6.5%

7. India's GDP growth to surpass 6.5% in FY26, driven by Sitharaman's tax cuts: Moody’s

India’s real Gross Domestic Product (GDP) growth is projected to exceed 6.5% in the fiscal year ending
March 2026, said Moody’s Ratings in its latest Banking System Outlook – India report. The agency
attributed this growth to increased government capital expenditure, tax cuts, and interest rate
reductions.

Moody’s report highlighted that India’s economy is set to recover from a cyclical slowdown. The Union
Budget 2025-26, presented by Finance Minister Nirmala Sitharaman, introduced significant tax relief
under the new tax regime, exempting income up to Rs 12 lakh from taxation. The measures are
expected to boost consumption and contribute to overall economic expansion.

Banking sector outlook

Moody’s maintained a stable outlook for India’s banking sector, stating that while the operating
environment will remain favourable, asset quality may deteriorate slightly after significant
improvements in recent years. Stress is expected in unsecured retail loans, microfinance, and small
business loans.

However, banks’ profitability is likely to remain adequate, with only marginal declines in net interest
margins (NIMs) despite modest rate cuts. Loan growth across the banking sector is expected to
moderate to 11-13% in FY26, compared to an average of 17% between March 2022 and March 2024.
Banks are expected to align loan growth with deposit expansion.

Inflation and monetary policy

Moody’s stated that India’s average inflation rate will decline to 4.5% in FY26 from 4.8% in the previous
fiscal year.

To control inflation, the Reserve Bank of India (RBI) raised its policy rate by 250 basis points between
May 2022 and February 2023. Subsequently, in February 2025, the central bank lowered its policy rate
by 25 basis points to 6.25%.

The ratings agency expects further rate cuts to be gradual, citing global economic uncertainties,
including potential shifts in U.S. trade policies and currency market volatility.

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