“We forecast India’s GDP growth to hold steady at 6.5% this fiscal year (year ending March 31, 2026). We expect domestic demand to remain strong, supported by a largely benign monsoon season, cuts in the income and the goods and services tax, and accelerating government investment.” S&P said in its latest report.
India harder hit by US tariffs
The report notes that India has faced a steeper increase in effective US tariffs than most of its regional peers, including China. This is creating challenges for the country’s ambitions to expand its role in global manufacturing supply chains.
“US tariffs on imports from different Asian economies will shape both their export outlook and their role in regional supply chains. Relative to our June assumptions on US tariffs, China has so far fared somewhat better than other Asian economies, and Southeast Asian emerging markets somewhat worse. India has been hit much harder than expected, and the region’s developed economies broadly as expected,” the report observed, adding that the tariff burden risks undermining export competitiveness at a time when policymakers are seeking to position the country as an alternative manufacturing hub.
Despite these external headwinds, India’s domestic economy is showing resilience. S&P attributes this to a largely favourable monsoon supporting rural consumption, cuts in income and goods and services taxes (GST), which have boosted household spending, and accelerating government investment in infrastructure, which has provided a strong impetus for growth even as private capital expenditure remains subdued.
In the June 2025 quarter, India’s GDP expanded 7.8%, beating forecasts. However, S&P highlighted that much of this momentum came from public sector-driven investment rather than private industry.
Inflation pressures in India have receded sharply. S&P cut its FY25-26 inflation forecast to 3.2%, down from 4.6% last year, largely due to easing food prices. This has given the Reserve Bank of India (RBI) room for monetary easing.
The agency expects a 25 basis point rate cut, bringing the repo rate to 5.25% by the end of the fiscal year.
“For India, we have revised our inflation forecast down to 3.2% for this fiscal year after a sharper than expected decrease in food inflation. This leaves room for further monetary policy adjustments and we anticipate a 25 bps rate cut by the Reserve Bank of India this fiscal year,” it said. This would mark a full percentage point reduction from FY24-25, when the rate stood at 6.25%.
Unlike most Asia-Pacific peers, whose currencies have strengthened against the US dollar in 2025, the Indian rupee has weakened, alongside the Indonesian rupiah. S&P projects the rupee to end FY25-26 at ₹88 per dollar, compared with ₹86.6 last year. Persistent currency weakness underscores the pressures India faces in balancing trade competitiveness with imported inflation risks.
China’s competition looms large
India’s manufacturing aspirations face another hurdle: intensifying competition from Chinese exporters.
As China struggles with overcapacity and weak domestic demand, its firms are increasingly targeting overseas markets, pushing cheaper goods into Asia, including India.
The report warns that India’s manufacturers, already contending with tariff headwinds, may struggle to match China’s aggressive price-quality mix.
Outlook: India to stay a regional bright spot
Looking ahead, S&P projects India’s growth to remain robust:
• 6.5% in FY25-26
• 6.7% in FY26-27
• 7.0% in FY27-28
• 6.8% in FY28-29
Across Asia-Pacific, growth momentum is expected to slow through the rest of 2025 and into 2026 as external headwinds intensify. S&P Global Ratings points to the rise in US import tariffs and weaker global demand as the main drags on regional trade. While Asia’s exports held up earlier this year, aided by frontloading and strong demand for technology products, the outlook is clouded by tariff uncertainty and slowing consumption in advanced markets.
China’s economy is forecast to grow 4.6% in 2025 and 4.0% in 2026, as exports weaken and domestic demand remains tepid. Southeast Asian economies such as Malaysia, Thailand, and Vietnam are expected to lose some growth momentum, though they continue to benefit from robust electronics demand and supply chain integration. Developed economies like Japan (1.1% growth in 2025) and South Korea (0.7%) are also feeling the strain from weaker exports, despite policy support at home
Despite rising trade barriers, the report highlights that domestic demand remains a stabilising force across much of Asia. Consumption is holding up in emerging markets such as India, Indonesia, and the Philippines, supported by healthy labour markets, easing inflation, and accommodative monetary policy. Regional central banks have already cut interest rates by an average of 55 basis points in 2025, and further easing is expected as US policy rates trend lower.
The report also highlights the risk of China’s manufacturing overcapacity spilling into regional markets, intensifying competition for other emerging Asian economies. Still, the Asia-Pacific as a whole is projected to grow 4.4% in 2025 and 4.0% in 2026, suggesting that while the pace of expansion will moderate, the region will remain a global growth engine, with India standing out as one of its most resilient performers