2025: year of high growth but sliding rupee

Calendar year 2025, with last three months of fiscal year 2024-25 (FY25) and the first 9 months of fiscal year 2025-26 (FY26), never had any dull moment.

The year opened with Union Budget for FY26, which announced one of the biggest Income Tax rationalisation – making  annual income up to ₹12.75 lakh totally tax free under new tax regime.

In this Budget, one more ‘C’ (consumption) was added to already prioritised first ‘C’ (capital expenditure). Later, it was revealed that the Budget was also beginning of another key exercise to further boost the consumption: the much-awaited GST rate rationalisation. This exercise was finally made effective from September 22 with two basic rate structure of 5 and 18 per cent and a special slab of 40 per cent.

While domestically, India was taking decisions for financial stability, there was a jolt in the form of higher tariff imposition by the US: 50 per cent tariff, including a punitive tariff of 25 per cent levied on Indian exports.

It was said that such a high tariff will affect sectors such as gems & jewellery and textiles besides others. These sectors are yet to recover and now, States such as Tamil Nadu, (Tirupur in the State well known for textiles) is requesting Centre to help in negotiating with the US so that industries in their States could have better time. This development also put pressure on Indian rupee that breached the 91 level and reached an all time low of 91.38 against the US dollar.

However, the country’s headline economic growth number was heading northwards with three successive quarters (January-March quarter of FY25 and two successive quarters- April-June, July-September of FY26) clocking over 7 per cent growth, with the last print passing all the expectations to reach 8.2 per cent. This trend prompted the Union government, RBI and various agencies to revise the growth forecast upwards for FY26. While, the government expects growth to be 7 per cent or more, RBI’s projection is 7.3 per cent.

This will be possible, even after some slowdown during the second half of the current fiscal. A report by CareEdge said that healthy agricultural activity, reduced income tax burden, rationalisation of GST rates, RBI rate cuts, festive demand, and front-loading of exports supported growth in H1 (April-September) FY26.

“We expect the GDP growth to moderate to around 7 per cent in H2 as the impact of front-loading of exports fades and consumption demand moderates post-festival season,” it said while adding that by the fourth quarter of FY26, the low base effect will wane, and the deflator will also increase from the current low level. “We project GDP growth at 7.5 per cent for FY26,” it said.

Taking it forward, Rajeev Juneja, President of PHDCCI, said: “India’s economy in FY26 is projected to maintain steady growth, supported by strong domestic demand, expanding consumption and continued structural reforms especially GST,” he said.

The prospects for growth in the coming year got a big boost when, after a gap of 18 years, S&P Global upgraded India’s sovereign rating to ‘BBB’ from ‘BBB-’. Three other agencies, Morningstar, DBRS, and Japanese credit ratings agency R&I also upgraded India’s rating. The improved rating is expected to make the country more attractive to foreign investors and help it maintain a higher growth rate besides maintaining health of public finance.

“In light of the recent sovereign rating upgrade, fiscal health especially general government (Centre and Sates) fiscal consolidation and moderation in public debt levels, we don’t expect any compromise in meeting the FY26 fiscal deficit targets. With FY27 deficit targets likely to be built into a range, that will leave more leeway to modulate finances with an eye on lowering overall public debt levels. A range of 4.2-4.3 per cent of GDP seems viable,” said Radhika Rao, Senior Economist with DBS Bank.

Now expectation is that next fiscal year (FY27) will see good growth. “With fiscal and monetary headwinds receding, GDP growth has picked up in FY26. In FY27, the pace of fiscal consolidation should slow further (20bps), and lagged effects of monetary easing should become visible, pushing growth to 7.5 per cent (above trend). Regulatory reforms are likely to continue, supporting upgrades to trend-growth assumptions. Given the economic slack, the economy can sustain above-trend growth for a few years before inflationary pressures build up,” said Neelkanth Mishra, Chief Economist, Axis Bank & Head – Global Research, Axis Capital.

Published on December 31, 2025