India's GDP To Expand 6.5 Per Cent Amid Tax Cuts: Moody's Report

India's economic growth is set to pick up steam as its real Gross Domestic Product (GDP) will cross 6.5 per cent during the year ended March 2026, said Moody's Ratings in its most recent Banking System Outlook – India report on March 12, 2025. This anticipated growth has been attributed to heightened government capex, recently lowered taxes, and softening interest rates by the rating firm.

The report highlighted that India's economy is on the path to recovery from a cyclical slowdown. Various policy initiatives, such as tax reforms unveiled in the Union Budget 2025-26, are likely to propel this growth trend.

Economic Recovery Driven by Government Measures

Moody's pointed out that government expenditure and monetary policy shifts are major contributing factors towards this optimistic perspective. The Union Budget for 2025-26, which Finance Minister Nirmala Sitharaman rolled out, provided major tax relief under the new tax regime by excluding annual income up to Rs 12 lakh from tax.

These tax reductions will help boost disposable income, and more consumer spending will follow, which will further drive economic growth. In addition to this, higher government capital spending on development and infrastructure projects is anticipated to create jobs and enhance economic activity.

Moody's report said real GDP growth is expected to increase from 6.3 per cent in FY25 to more than 6.5 per cent in FY26. The Economic Survey of the Finance Ministry had previously estimated GDP growth between 6.3 and 6.8 per cent for the coming fiscal year, while official estimates have predicted 6.5 per cent growth for the current financial year.

India's economic growth was already being seen in the latest GDP data. After having dipped to 5.6 per cent during the July-September 2024 quarter, growth in GDP snapped back into high gear to reach 6.2 per cent during the subsequent quarter, reflecting strengthening economic activity.

Banking Sector Outlook

In its report, Moody's had a positive outlook for India's banking industry, saying that Indian banks' operating environment would continue to be robust. However the agency cautioned that there could be some risks developing in specific lending segments.

Although the overall asset quality of banks has improved substantially over the past few years, Moody's warned that unsecured retail loans, microfinance, and small business loans may experience marginal deterioration. Increased pressure in these segments could be due to higher lending to riskier borrowers during the economic downturn.

In spite of this, Indian banks are anticipated to be adequately profitable. Moody's pointed out that although net interest margins (NIMs) may experience slight reductions, they are not likely to drop sufficiently to endanger banks' overall stability.

Growth in loans at Indian banks is expected to ease to 11 to 13 per cent in FY26 from an average of 17 per cent during the period March 2022 to March 2024. This moderation is indicative of banks moving to match the growth in loans with the increase in deposits in order to promote sustainable credit expansion.

Inflation and Monetary Policy

Moody's report also mentioned India's inflation patterns and monetary policy. The agency forecasts India's average inflation rate to fall to 4.5 per cent in FY26 from 4.8 per cent in the last fiscal year.

To manage increasing prices, the Reserve Bank of India (RBI) increased its policy rate by 250 basis points from May 2022 to February 2023. This tight policy contained inflationary pressures. With inflation now softening, the RBI has started to turn its attention towards stimulating economic growth.

The RBI lowered its repo rate by 25 basis points to 6.25 per cent in February 2025. Further rate reductions will be steady, Moody's foresees, amid persisting global economic uncertainties.

As interest rates ease, those paying home loans or considering big-ticket purchases may gain from lower EMIs or better loan eligibility. Financial planners recommend opting for refinancing or taking fixed-rate home loans before subsequent rate cuts reduce this window of opportunity.

The report identified risks from possible shifts in U.S. trade policy and currency market volatility. It said that the appreciation of the U.S. dollar against emerging market currencies towards the end of 2024 and early 2025 could lead the RBI to be cautious about further reducing interest rates.

According to Moody's, the RBI will likely exercise caution when implementing any rate decreases, as seen by the strengthening of the US dollar relative to developing market currencies in late 2024 and early 2025.

Moody's overall view presents an optimistic picture for India's economic growth and banking industry in spite of some near-term risks. The blend of government expenditure, lenient tax policies, and moderate monetary easing should provide benign conditions for economic recovery.

Although some loan segments like unsecured retail loans and microfinance could be affected, Moody's assumes Indian banks to be capable of keeping their profitability strong and controlling risks in place.

With GDP expansion likely to exceed 6.5 per cent in FY26, Moody's assessment indicates optimism that India will be able to maintain economic momentum and balance inflation management and financial stability.