Moody's Ratings on Wednesday said India's economic growth will exceed 6.5 per cent in the next fiscal, up from 6.3 per cent this year, on higher government capex and consumption boost from tax cuts and interest rate reduction.

Projecting a stable outlook for the banking sector, Moody's said although the operating environment of Indian banks will remain favourable in the next fiscal, their asset quality will deteriorate moderately after substantial improvements in recent years, with some stress in unsecured retail loans, microfinance loans and small business loans.

Banks' profitability will remain adequate as declines in net interest margins (NIMs) are likely to be marginal amid modest rate cuts, it said.

Moody's said that following a temporary slowdown in mid-2024, India's economic growth is expected to reaccelerate and record one of the fastest rates among large economies globally.

"Government capital expenditure, tax cuts for middle-class income groups to boost consumption and monetary easing will help India's real GDP growth exceed 6.5% for fiscal 2025-26 from 6.3% in fiscal 2024-25," Moody's Ratings said.

The finance ministry's Economic Survey has projected GDP growth for next fiscal at 6.3-6.8 per cent. As per official estimates, GDP growth in the current fiscal would be 6.5 per cent.

The country's real GDP growth slowed to 5.6 per cent in the July-September 2024 quarter before rebounding to 6.2 per cent in the following quarter.

Moody's expects India's average inflation rate to decline to 4.5 per cent in fiscal 2025-26 from 4.8 per cent in the previous year.

The Reserve Bank of India (RBI) raised its policy rate by 250 basis points from May 2022 to February 2023 to tame inflation, which has gradually led to increases in interest rates for borrowers.

The RBI lowered its policy rate by 25 basis points to 6.25 per cent in February 2025.

"We expect further rate cuts to be modest, as the central bank takes a cautious stance amid global uncertainty around US trade policies, as well as associated market and exchange rate volatility, as represented by a strengthening of the US dollar against emerging market currencies in late 2024 and early 2025," Moody's said.

We expect system-wide loan growth to slow to 11-13 per cent in fiscal 2025-26 from an average of 17 per cent for March 2022-March 2024 as banks seek to keep loan growth in tandem with deposit expansion, Moody's said.