India’s economy is likely to stand firm in an uncertain world

Goldman Sachs Research expects the Indian economy to be relatively insulated against global shocks over the coming year — including tariffs levied by the new administration of US President-elect Donald Trump. India’s GDP will keep growing strongly in the long term — but with a speed bump next year as government spending and credit growth slow, according to our economists’ forecast.

“The structural long-term growth story for India remains intact driven by favorable demographics and stable governance,” Santanu Sengupta, chief India economist at Goldman Sachs Research, writes in his team’s report.

Our economists expect India’s economy to grow at an average of 6.5% between 2025 and 2030. Their 6.3% forecast for 2025 is 40 basis points below a consensus of economists surveyed by Bloomberg.

The decelerated growth rate is, in part, because public capital expenditure growth is declining. The Indian central government’s capex growth declined from 30% year-on-year CAGR between 2021 and 2024 to mid-single digits growth in nominal terms in 2025, according to budget estimates. 

Credit is also tightening. Total private sector credit growth in India peaked in the first quarter of the 2024 calendar year and decelerated over the last two quarters. The slowdown was mainly driven by bank credit growth declining to around 12.8% as of October, from over 16% in the first quarter of this calendar year. In particular, there was a slowdown in household credit growth in unsecured personal loans, following a tightening of retail loans by the Reserve Bank of India in November 2023.

What is the outlook for Indian inflation?

Headline inflation in India is expected to average 4.2% year-on-year in the 2025 calendar year, with food inflation at 4.6% — much lower than our analysts’ estimate of 7%-plus for 2024, thanks to adequate rainfall, and good sowing of the summer crop. Food supply shocks due to weather-related disruptions remain the key risk to this forecast. Thus far, elevated and volatile food inflation, mainly driven by vegetable prices due to weather shocks, has kept the RBI from easing monetary policy.

Core inflation should be around the RBI’s target of 4% year-on-year in 2025, with some possibility that inflation will decline if US tariffs compel Chinese manufacturers to reallocate their products to regional markets.

“The easing cycle from the RBI is likely to be cautious, given uncertainties on global trade policies and their impact on financial markets,” Sengupta writes. His team estimates the nominal neutral rate at 6% for India, so the RBI’s rate cuts are likely to be shallow. Goldman Sachs Research expects the RBI to cut rates by 25 basis points in February, and then again 25 basis points in April.

“The overall preference of Indian policymakers in recent years has been macro-economic resilience over chasing short-term spurts of growth,” Sengupta writes, adding that strengthening public and private balance sheets will continue to be a priority. “The key risks to the India growth story are from exogenous shocks — while most observers do not expect India to be a direct target of Trump’s tariff policies, a rising bilateral trade surplus with the US could bring some unwanted attention.”

How will Indian stock markets fare in 2025?

India’s equities are likely to perform strongly in the medium term, according to a separate report from Goldman Sachs Research. In the near term, though, slowing economic growth, high starting valuations, and weak earnings-per-share revisions could keep markets rangebound.

Our equity strategists expect the benchmark NIFTY index to reach 27,000 by the end of 2025. They also forecast MSCI India earnings growth at 12% and 13% respectively for the calendar years 2024 and 2025 — lower than consensus expectations of 13% and 16%. 

The MSCI India index of stocks is trading at a 23x forward P/E multiple, which is significantly above the 10-year mean and above our strategists’ top-down fair value estimate of 21x, suggesting further de-rating risk.

“History suggests muted near-term returns when starting valuations are high and earnings are seeing downgrades,” Sunil Koul, Goldman Sachs Research’s emerging markets equity strategist, writes in his team’s report. “We expect the market to remain range-bound over the next three months.” His team forecasts a three-month NIFTY target of 24000, but expects a back-loaded recovery to their 12-month target of 27,000, driven by underlying earnings growth.

Koul’s team remains neutral on India stocks in the near term but sees opportunities in some domestic sectors like autos, telcos, insurance, real estate, and e-commerce, which may have a clearer path to stronger earnings, he says. 

 

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