India’s economy showed a sharper-than-expected growth acceleration in the fourth quarter of FY2025, with GDP rising to 7.4%, well above forecasts, while annual growth for the full year slowed compared to FY2024. Despite this mixed picture, the Reserve Bank of India (RBI) is expected to continue its monetary easing policy cautiously, balancing the moderate growth and inflation outlook.
The GDP growth picked up significantly in Q4 FY2025 compared to the previous quarter’s 6.4%, driven largely by a jump in net indirect taxes. However, this sharp acceleration should be viewed with caution, as subsidy payouts influenced this figure unevenly. Meanwhile, gross value added (GVA) growth showed a steadier but welcome improvement to 6.8% in Q4 from 6.5% in Q3, led mainly by strong performances in manufacturing and construction sectors.
Government spending and trade impact
On the expenditure side, gross fixed capital formation rose to a six-quarter high of 9.4%, supported by increased government capital expenditure at both central and state levels. This government push helped boost economic activity despite a decline in consumption growth, which slowed due to weaker private and government final consumption expenditure. Net exports also contributed positively to GDP growth, aided by a sharp reduction in imports during the quarter, enhancing the trade surplus.
Annual growth data for FY2025 shows a significant slowdown, with GDP growth slipping to 6.5% from 9.2% in FY2024, reflecting a broad-based deceleration. Most sectors, except agriculture and public administration, reported slower growth. Manufacturing, in particular, slowed sharply to 4.5%, down from an exceptional 12.3% the previous year, partly due to a high base effect.
Despite slower annual growth, private final consumption expenditure accelerated to 7.2%, contrasting with narratives of weak urban demand. However, discrepancies in data between the first and second halves of the fiscal year indicate that revisions might alter the picture of expenditure growth going forward.
Looking ahead, the RBI’s Monetary Policy Committee is expected to reduce policy rates gradually, with a likely 25 basis points cut in the upcoming meeting and two further cuts over subsequent reviews. This easing aims to support the economy amid moderate inflation forecasts and global uncertainties, while keeping financial market stability in check.
