India Faces Growth Headwinds as Moody’s Lowers 2025 Forecast to 6.1%

India's economic outlook for 2025 has taken a hit as Moody's Analytics revised its growth forecast downward to 6.1%, trimming 30 basis points from its earlier projection. 

This revision comes amid escalating trade tensions triggered by newly imposed US tariffs. The US administration, under President Trump, initially announced punitive duties ranging between 24% and 46% on a range of Asian economies, including India. Although a temporary 90-day pause has reduced the rate to a flat 10%, Moody's cautions that the economic consequences could be significant if the original measures are eventually enforced.

The downgrade reflects the rising unease surrounding the international trade environment. It is the impact of this unease that is far-reaching, as voiced by Moody's, and it is affecting the country in ways we have not quite noticed yet. To point out the obvious, when investors are uncertain, they pull back from investing in the markets. This is creating a ripple effect across all kinds of assets, with resentment seeping into the trade corridors.

Policy Adjustments and Domestic Demand Cushion Impact

To mitigate any potential fallout, the Reserve Bank of India (RBI) has acted ahead of the curve. On April 9, the central bank cut the repo rate by 25 basis points to 6.0% and changed its stance from neutral to accommodative, which means it is now signaling an openness to further rate cuts. Analysts see at least one more 25 basis point cut coming this year, which would give us a nominal policy rate of 5.75%. 

This monetary easing, coupled with the tax incentives introduced in the recent Union Budget, is expected to support a recovery in domestic consumption, which is now our best line of defense against the sort of external shocks that seem to be in prospect.

Though sectors such as textiles, medical devices, and gemstones are under pressure, India has a very low reliance on global demand. This is the underlying reason for not revising the country's growth forecast. Moody's prediction is that India will grow at 6.1 % in 2025, with its baseline forecasts from 2024-2028 remaining steady.

Short-Term Challenges, Long-Term Opportunities

Although the temporary halt in tariffs offers short-term relief, the course ahead is still not clear. Talks between the two sides, under the auspices of the last round of bilateral meetings between USTR (The Office of the United States Trade Representative) and Indian commerce officials, could yet reshape both the duration and the reach of the new tariffs. The decision by the US to extend the 90-day pause, which is the first such move since the onset of the trade war in 2018, looks to be particularly crucial.

The broader context encompasses a worldwide deceleration and diminishing domestic impetus, which together complicate fiscal and economic planning. Yet, in the face of these difficulties, opportunities might arise. Stricter US trade policies could redirect global supply chains, possibly placing India in a more advantageous position in crucial sectors like electronics.