Moody's Ratings announced on Wednesday that India’s economic growth is expected to surpass 6.5% in the upcoming fiscal year, an increase from the 6.3% growth projected for this year.

The growth is attributed to higher government capital expenditure and a boost in consumption driven by tax cuts and interest rate reductions.

Moody's also projected a stable outlook for India's banking sector, noting that while the operating environment for Indian banks will remain favourable in the next fiscal year, their asset quality is likely to decline slightly after significant improvements in recent years.

The sector may experience some stress in unsecured retail loans, microfinance loans, and small business loans, Business Standard reports.

In addition, Moody's stated that banks' profitability will remain sufficient, as any declines in net interest margins (NIMs) are expected to be minimal, due to modest interest rate cuts.

The agency also noted that after a brief slowdown in mid-2024, India's economic growth is projected to pick up again, achieving one of the fastest growth rates among major global economies.

“Government capital expenditure, tax cuts for middle-class income groups to boost consumption and monetary easing will help India's real GDP growth exceed 6.5% for fiscal 2025-26 from 6.3% in fiscal 2024-25,” Moody's Ratings stated.

Furthermore, the finance ministry's Economic Survey has forecast GDP growth for the next fiscal year to be between 6.3% and 6.8%. According to official estimates, GDP growth for the current fiscal year is expected to be 6.5%.

India's real GDP growth slowed to 5.6% in the July-September 2024 quarter, but it rebounded to 6.2% in the subsequent quarter.

Moody's expects India's average inflation rate to decrease to 4.5% in fiscal 2025-26, down from 4.8% in the previous year.

To curb inflation, the Reserve Bank of India (RBI) raised its policy rate by 250 basis points between May 2022 and February 2023, resulting in gradual interest rate hikes for borrowers.

In February 2025, the RBI reduced its policy rate by 25 basis points to 6.25%.

“We expect further rate cuts to be modest, as the central bank takes a cautious stance amid global uncertainty around US trade policies, as well as associated market and exchange rate volatility, as represented by a strengthening of the US Dollar against emerging market currencies in late 2024 and early 2025,” Moody's said.

“We expect system-wide loan growth to slow to 11-13% in fiscal 2025-26 from an average of 17% for March 2022-March 2024 as banks seek to keep loan growth in tandem with deposit expansion,” Moody's added.