India’s internal growth drivers anchor the economy amid US policy shifts: Moody's

India’s homegrown demand shields nonfinancial companies against tariffs, according to Moody’s. Significant government investments will boost sectors such as construction, mining and manufacturing, while urbanisation and a young population will fuel demand for housing and consumer goods, it said. However, sectors with exports, like automotives, are exposed to global trade challenges, despite diversified operations.

Moody’s highlighted that Indian companies will remain somewhat insulated from global turmoil, driven by two primary engines: infrastructure development and the country’s favorable demographics.

The change in the Reserve Bank of India’s (RBI’s) monetary policy stance to “accommodative” from “neutral” will provide room for further easing in the months to come. Interest rate reductions lower funding costs for companies, increase households’ debt affordability and stimulate overall growth. During the first two monetary policy meetings of the year, the RBI lowered the benchmark repo rate to 6% from 6.5% at the beginning of the year, reflecting easing inflation, slowing economic output and growing trade tensions globally. Headline inflation continued to ease to 3.16% in April, dropping deeper below the RBI’s 4% midpoint target.

The personal income tax cut, announced in the Budget, will mostly benefit urban middle-income households by increasing their disposable income and spending, said Moody’s. “Private consumption has remained steady, accounting for 62% of GDP in April to December 2024, the highest level for the first three quarters of a fiscal year over the past decade. However, demand recovery in urban areas lags behind rural areas, because of stagnant real-wage growth. The tax cut, removing direct tax liabilities for workers earning under $13,860 annually, offers crucial relief to debt-burdened middle-class households and speeds up demand recovery in urban regions,” it said.