Month: January 2026

The International Monetary Fund (IMF) has projected a notable moderation in India’s economic growth, with GDP growth expected to slow to 6.4% in FY27, marking a significant year-on-year decline. The forecast reflects a normalization of growth after the post-pandemic rebound and follows an estimated expansion of 7.3% in FY26 and around 6.6% in FY25.

According to the IMF, the slowdown is largely driven by cyclical and temporary factors, including fading base effects, moderation in domestic demand, and a more challenging global environment. Despite the deceleration, India is expected to retain its position as the world’s fastest-growing large economy, outperforming peers such as China, the US, and major European economies.

Key Takeaways from the IMF Outlook

• FY27 GDP growth projected at 6.4%, unchanged from the IMF’s October 2025 forecast.

• Growth moderation is attributed to cyclical normalization, not structural weakness.

• India remains the fastest-growing large economy globally, despite the slowdown.

• Upward revisions to earlier growth estimates reflect strong recent momentum and better-than-expected performance in FY26.

• Inflation is expected to move closer to target levels, offering some macroeconomic stability.

Broader Economic Context

The IMF noted that upcoming revisions in India’s GDP base year and data methodology, expected from the Ministry of Statistics, could lead to future forecast adjustments. Additionally, supportive fiscal and monetary policies, improving investment activity, and private-sector adaptability continue to provide resilience to India’s growth outlook.

Overall, while the IMF’s projection signals a cooling of growth momentum, it underscores that India’s medium-term fundamentals remain strong, with growth expected to stay well above the global average.

Source: The Economic Times

India continues to deliver robust returns on foreign direct investment (FDI), with the average return standing at around 7.3%, according to a report by CareEdge Ratings. This level of return is higher than many other emerging and even some developed economies, reinforcing India’s position as an attractive long-term investment destination despite global economic uncertainties.

While gross FDI inflows have remained resilient in the range of US$70–85 billion annually over the past five years, net FDI has moderated due to higher profit repatriation by foreign investors and a rise in outward investments by Indian companies. However, the strong return profile suggests that investors continue to generate healthy profitability from their investments in India.

Key Insights from the Report

• Superior Investment Returns: India’s 7.3% average FDI return compares favourably with other emerging markets, underlining the quality of investment opportunities and operational efficiencies in the country.

• Sectoral Strength: The services sector remains the largest recipient of FDI, followed by computer software and hardware, trading, and non-conventional energy.

• Emerging Growth Areas: New-age sectors such as semiconductors, electric vehicles, battery storage, renewable energy, and data centres are increasingly attracting foreign capital.

• Global Headwinds: Although global FDI flows have been impacted by geopolitical tensions and slower economic growth, India has maintained its relative attractiveness due to strong domestic demand and structural reforms.

Why This Matters

India’s ability to consistently deliver higher returns on foreign capital highlights the depth of its domestic market, improving ease of doing business, and long-term growth potential. For global investors, this return performance offsets near-term volatility and reinforces confidence in India as a strategic investment destination.

Overall, the data underscores that while the composition and pace of FDI flows may evolve, India’s investment fundamentals and return potential remain firmly intact, supporting sustained interest from global capital over the medium to long term.

Source: The Economic Times

The Reserve Bank of India (RBI) has reduced its holdings in US Treasury securities to below US$200 billion, reflecting a strategic shift in managing its foreign exchange reserves. This marks a substantial reduction from over US$240 billion a year earlier and represents the first annual decline in US Treasury exposure in four years.

At the same time, the RBI has increased its gold reserves, with holdings rising to 880.18 metric tonnes by the end of October 2025 — up from 866.8 tonnes a year ago — underscoring a deliberate move toward asset diversification.

Gold now accounts for a larger share of India’s total foreign exchange reserves, rising to approximately 13.6 %, compared with about 9.3 % in the previous year. This shift aligns with a broader global trend among central banks to bolster safe-haven assets amid economic uncertainty and higher bond-yield risks.

Despite trimming US Treasuries, India’s overall forex reserves have remained relatively stable, indicating that the RBI’s rebalancing efforts have not significantly weakened the country’s external buffers.

Analysts say the strategy reflects a desire to reduce valuation risk from rising global bond yields and strengthen reserve resilience by holding a mix of assets, including gold, that can better hedge against volatility.

In the same period, several other central banks — including those of the UK, Belgium, Japan, France, Canada and the UAE — increased their exposure to US Treasuries, highlighting India’s unique approach in the current environment.

Overall, the RBI’s reduction in US Treasury holdings and concurrent increase in gold reserves signal a strategic diversification of India’s forex portfolio, aimed at enhancing financial stability and mitigating risks associated with over-dependence on dollar-denominated assets.

Source: The Economic Times

Credit growth in India’s banking system is showing meaningful signs of revival, supported by recent GST rate cuts, improved demand, and supportive regulatory actions — with system credit expected to grow around 12% in FY26 and nearly 13% in FY27. This trend reflects a gradual recovery in credit demand after a period of slowdown in the credit cycle.

Stronger Credit Momentum Emerging

A report by Motilal Oswal Financial Services highlights that:

• As of December 12, 2025, system credit growth improved to about 11.7% year-on-year, recovering from a low of 8.9% in May 2025 and staying above 10% since mid-2025.

• The revival in credit has been driven largely by consumption-led demand, supported by GST rate cuts that have helped stimulate activity across sectors.

• A full 100 basis-point Cash Reserve Ratio (CRR) cut is now in effect, enhancing liquidity in the banking system and providing further support for credit expansion.

Expected Trends in FY26–FY27

• Credit Growth Forecast: The report expects systemic credit growth to remain around 12% year-on-year in FY26 and to improve further to about 13% in FY27.

• Deposit Growth: Deposit growth has remained stable, at around 9.7–10% year-on-year, supporting banks’ ability to fund the expanding credit demand.

• Bank-Level Prospects: Within the banking universe, large private sector banks are projected to post moderate quarter-on-quarter growth, while mid-sized banks may record faster expansion due to more nimble lending strategies.

Why GST Cuts Matter for Credit Expansion

GST rate reductions — particularly on consumer and intermediate goods — have acted as a demand stimulus by lowering effective prices, boosting consumption, and contributing to stronger overall economic activity. This, in turn, has encouraged greater credit uptake among consumers and businesses. In addition, supportive monetary measures like CRR cuts have enhanced liquidity, enabling banks to lend more readily.

What This Means for the Economy and Markets

• Growth Support: Rising credit growth aids economic expansion by financing consumption, housing, MSME activity and capital investment.

• Banking Sector Dynamics: Banks may see improved asset quality and loan demand, especially in retail, personal loans, mortgages and SME segments.

• Interest-Rate Sensitivity: With credit growth picking up, banks may benefit from improved margins if deposit repricing stabilises and credit demand remains robust.

In summary, the convergence of GST-driven demand improvement, liquidity support (CRR cuts), and broader economic momentum is expected to lift systemic credit growth to around 12% in FY26 and 13% in FY27  a positive sign for the credit cycle and financial sector prospects.

Source: The Economic Times