As the global economy continues to grapple with geopolitical tensions and financial market volatility, India is at a critical juncture in its growth story. DBS Bank’s latest report provides a nuanced perspective on the challenges and opportunities facing the Indian economy in 2025. While the outlook remains optimistic, the report, authored by Radhika Rao Senior Economist, DBS Bank and Philip Wee, Senior FX Strategist, DBS Group, highlights both structural strengths and cyclical headwinds.
Trump 2.0 and its implications for India
One of the key global factors affecting India’s prospects is the possible return of Donald Trump as US President. DBS Bank notes that increased tensions between the US and China under Trump 2.0 could lead to greater volatility in financial markets, which could impact both global and Indian markets. The dollar is likely to increase pressure on Indian assets and flows,” the report said. Although the Indian rupee has recently hit a new low, the currency’s relatively low sensitivity to US Treasury movements provides some insulation.
DBS Bank also underlines India’s strategic advantages in such a scenario. With deeper export and investment ties with the US than with China, India will be able to benefit from its strong trade ties. “The US is India’s largest export destination for goods and services, followed by the EU,” the report added. Moreover, India’s strengths in sectors such as agriculture, chemicals and textiles could help the country maintain robust trade with the US
However, challenges remain. Trade skirmishes, like those during Trump’s first term, could resurface. Moreover, restrictive US immigration policies could weigh on India’s vital services sector.
India’s domestic growth drivers and headwinds
Indian growth is expected to moderate to a more sustainable pace of 6.0% in FY25 and FY26, down from 8.2% in FY24. DBS attributes this slowdown to persistent inflation, tight financing conditions and election-related slowdowns in government spending.
The rural sector is showing signs of recovery, but urban demand has weakened. The report highlights factors such as slower consumer borrowing and weaker auto sales, which have weighed on urban consumption. In addition, regulatory measures and adverse weather conditions, including heat waves and unusual rainfall, impact economic production.
Inflation and monetary policy
Inflation remains a concern, driven by supply-side disruptions such as unusual rainfall and higher import taxes on key commodities. DBS Bank expects inflation to average 4.7% in FY25 and moderate further to 4.1% in FY26.
“The food basket continues to disrupt the disinflation process, confirming the central bank’s caution on rate cuts,” the report said. However, the Reserve Bank of India (RBI) is likely to start easing interest rates in February 2025, with an expected cumulative cut of 75 basis points by the end of the year.
Fiscal landscape and government spending
India’s fiscal consolidation remains on track, with the central government targeting a fiscal deficit of 4.9% of GDP for FY25. Public investment, which was subdued in the first half of the fiscal year, is expected to increase in the second half.
“The Centre’s capital expenditure will have to more than double in the next five months to meet the annual target of INR 11.1 trillion,” DBS noted. This increased spending is crucial for boosting growth in sectors such as construction and materials and encouraging private sector investment.
Long-term prospects: India’s resilience
Despite these cyclical challenges, India’s medium-term growth prospects remain strong. The country is on track to become the world’s third largest economy within five years, after the US and China.
DBS expects India’s real GDP growth to stabilize at around 6.5% to 6.6% over the medium term, supported by investments in infrastructure, digitalization and high-value sectors such as semiconductors. Moreover, stable macroeconomic indicators, including a current account deficit of less than 2% and record high foreign reserves, provide a strong foundation.
