For the Indian economy, 2025 was a Goldilocks phase with three major surprises. The first was robust GDP growth. Coming in at an impressive 7.4 per cent and 8.2 per cent in the first and second quarters of the current fiscal year, respectively, it surpassed expectations, leading to various stakeholders revising their forecasts upward.
The second surprise was sprung by inflation coming in lower than expected. Retail inflation dropped to 0.3 per cent in October, the lowest since fiscal 2012. Excluding gold, headline inflation is in the negative zone.
The third was the muted impact of the high tariffs imposed by the US on the global economy, India and the US itself. Elevated tariffs and record-high uncertainty had a less severe impact than anticipated on global growth, which the International Monetary Fund revised up by 40 basis points to 3.2 per cent for 2025.
Consequently, forecasts for the Indian economy’s growth have been revised upwards and for inflation, downwards. We have raised our GDP growth forecast for this fiscal by 50 bps to 7 per cent and expect inflation to average just 2.5 per cent. Global growth turned out stronger than expected. As the year progressed, the narrative shifted from concerns about downside risks due to tariff uncertainty to optimism driven by massive investments in the artificial intelligence (AI) ecosystem, particularly in the US.
The AI boom in the US also benefited several Asian and European economies by driving up their exports of high-tech hardware and related services to the US. This, together with frontloading of exports before the new tariff rollout, led the World Trade Organisation to revise its world merchandise trade volume growth for 2025 to 2.4 per cent from 0.9 per cent.
However, capital inflows into India were volatile. The rupee depreciated sharply and was the worst-performing currency among emerging market economies. Net foreign institutional investments were negative in equities and muted in debt instruments, and foreign direct investment remained subdued during the first eight months of the fiscal. This stress can be seen as a function of external shocks and domestic vulnerability. While India’s vulnerability is relatively low, it faced among the highest tariffs from the US, which weighed on investor sentiment.
During the taper tantrum in fiscal 2013, domestic vulnerability was elevated, amid high current account deficit (4.8 per cent of GDP), fiscal deficit (4.8 per cent of GDP) and retail inflation (9.9 per cent), and low GDP growth (5.5 per cent). India was then a part of the “fragile five”.
In fiscal 2025, all these parameters remain healthy, and India is primarily experiencing stress on the capital account. The US has been the key recipient of FDI, feeding into the AI boom, whereas the Indian markets faced valuation concerns. Consequently, the net capital inflows into India have been insufficient to finance the current account deficit below 1 per cent of GDP. A dose of good fortune came from a favourable monsoon and low crude oil prices — factors beyond the country’s control — that supported growth this fiscal. Additionally, proactive cyclical policies played a key role in activating domestic growth triggers and managing external risks from tariffs.
The dominant impact was from fiscal policy in the first half of the year. Government capital expenditure (capex) was frontloaded, and the mid-year rationalisation of the Goods and Services Tax rates complemented income tax reductions announced in the budget. Direct benefit transfers to women, which are estimated at upwards of Rs 2 lakh crore, also supported consumption.
On the monetary front, the RBI’s Monetary Policy Committee cut the repo rate by a cumulative 125 bps in calendar year 2025. It also announced a 100-bps cut in the cash reserve ratio, as well as regulatory easing and open market operations to improve transmission, facilitate bank lending and stabilise bond markets. We expect GDP growth of 6.7 per cent and inflation at 5 per cent, largely driven by the low base effect, in fiscal 2027. Tax collections should improve as nominal GDP growth picks up on the back of robust real growth and a moderate increase in inflation. However, the government’s ability to invest will be constrained by the need for fiscal prudence.
There are encouraging signs of a belated pick-up in private corporate capex, which we will closely monitor. It is worth pointing out that the nature of private investment is also undergoing a change. We estimate that over fiscals 2026 to 2030, the production-linked incentive scheme and emerging sectors combined are set to account for a quarter of the country’s capex, up from 12 per cent in fiscals 2021-2025. Data centres serve as a prime example in this context. With several technology multinationals committing to investments in India’s data centre, cloud and AI ecosystem, this segment is likely to witness robust growth and sustained investment in the medium term.
The scope for further policy rate cuts this fiscal is limited, but transmission of the already announced cuts will continue to support the economy, as monetary policy effects typically operate with a lag. The government is pushing ahead with domestic reforms, including deregulation, to improve the business climate and enhance the economy’s growth potential. This should support the initial signs of a lift in private investment.
We expect foreign capital inflows to recover next year and strengthen the rupee. There are signs of a pick-up in FDI with global tech majors announcing big investment plans for India. Reaching a trade agreement with the US is expected to reduce uncertainty and improve confidence, encouraging capital inflows into India.
The writer is Chief Economist, Crisil Limited