We expect the Indian economy to slow modestly, from 6.3% in 2024 to 6.1% in 2025, undershooting the Reserve Bank of India (RBI)’s expectations.

While the strong services sector should support activity, we think tight monetary and fiscal policy conditions and a sluggish manufacturing sector will weigh on growth. 

We believe this growth slowdown, alongside a softening of food price pressures, will prompt the RBI to deliver two 25bps interest rate cuts in February and June, taking the key policy rate to 6% by year-end.

Admittedly, there is a risk that recent rupee depreciation, which could be exacerbated by the policies of the incoming Trump administration in the US, could force the RBI to delay rate cuts until later in the year.

But we think new RBI governor Sanjay Malhotra will tolerate further rupee depreciation, given reduced domestic inflation risks, domestic liquidity challenges, and the previous loss of export competitiveness from past strength in the trade-weighted rupee.

That said, we expect the RBI to lean against particularly sharp FX moves, especially if substantial pressure on the currency were to arise from tensions with the US or broader market volatility. 

More broadly, we continue to think India can benefit from US efforts to shift supply chains out of China. 

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