India's economic growth is set to stay firm at 6.5 per cent in the current fiscal year, according to S&P Global Ratings, which retained its GDP forecast on Tuesday.
The rating agency attributed this steady outlook to strong domestic demand bolstered by a largely benign monsoon, tax reductions, and increased government investment. India's GDP surged 7.8 per cent in the first quarter, reflecting robust economic momentum.
S&P highlighted that a sharper-than-expected decline in food inflation has kept overall inflation down to 3.2 per cent, opening the door for monetary policy easing.
The ratings firm expects the Reserve Bank of India (RBI) to cut rates by 25 basis points during the fiscal year, given this favourable inflation environment.
S&P stated, "This leaves room for further monetary policy adjustments, and we anticipate a 25 bps rate cut by the Reserve Bank of India this fiscal year".
However, the growth forecast is not without headwinds. S&P cited the impact of increased US import tariffs and slowing global growth, noting that India has been hit "much harder than expected" by rising US tariffs compared to other Asian economies.
These external factors are expected to drag on India's export performance and complicate its ambitions to expand export-oriented manufacturing.
This external pressure is also reflected in recent market developments. The Indian rupee extended losses to hit an all-time low of 88.76 against the US dollar on Tuesday, driven in part by concerns over the US's sharp hike in H-1B visa fees to $100,000 per year. This measure threatens India's critical IT sector by increasing costs and potentially slowing remittances and service exports.
Market nervousness translated into significant foreign institutional investor outflows totalling nearly Rs 3,000 crore, adding to currency depreciation pressures.
The connection between S&P's steady GDP growth forecast and the rupee's weakening lies in the balancing act between strong domestic demand and external economic shocks.
While robust internal consumption, tax incentives, and government spending underpin growth, external shocks such as US tariffs and visa fee hikes are unsettling foreign investment and export-related sectors, pressuring India's currency and financial markets.
Despite these headwinds, S&P's outlook underscores confidence in India's resilient domestic economy as a buffer amid global uncertainties.
S&P keeping the GDP growth forecast at 6.5 per cent reflects strong underlying domestic demand supported by favourable monsoon and policy measures (like the latest GST 2.0), alongside manageable inflation that may enable RBI rate cuts. However, the impact of US trade policies and immigration fee hikes poses challenges to exports and financial markets, keeping the rupee under pressure and increasing foreign investment outflows.