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India’s Macroeconomic Outlook for 2025: Embracing Recovery and Global Shifts

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India’s Macroeconomic Outlook for 2025: Embracing Recovery and Global Shifts

May 23, 2025

6 min read

By 1 Finance team

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As we enter 2025, India stands at a pivotal moment, poised to become the world’s fourth-largest economy while embracing a complex global landscape. This quarterly update highlights India’s transition from a transitory slowdown to a recovery phase, driven by moderating inflation, robust rural consumption, and a strong manufacturing sector. Despite global challenges like trade tensions and monetary policy shifts, India’s domestic fundamentals offer a stable foundation for growth. This update distils the key insights from our Macro Outlook 2025, exploring investment opportunities, asset class trends, and the economic themes shaping India’s trajectory in 2025.

Key Takeaways

  • India’s economy is expected to shift from a transitory slowdown to a recovery phase in 2025, with a 60% probability, driven by cooling inflation (4-5%), rising rural demand, and private capex revival.
  • Indian large-cap equities are better positioned than mid- and small-cap due to reasonable valuations and resilience to global volatility. Sectors like banking, infrastructure, and pharma show promise.
  • With expected repo rate cuts of 50-75 basis points, short-term bonds (1-3 years) are set to benefit from a steepening yield curve, offering attractive returns.
    Gold is likely to outperform equities during the rate-cut cycle, supported by central bank reserve accumulation and its role as a portfolio diversifier.
  • US trade tariffs, China’s property sector challenges, and elevated US equity valuations (S&P 500 P/E at 30.6x) could create global market volatility, impacting India’s export sectors and FPI flows.

Here are 15 of our key views for 2025

1. India Poised to Enter 'Recovery' Mode

A 60% likelihood of economic recovery, driven by cooling inflation to 4-5% and surging rural consumption.

Source: CMIE Economic Outlook,1 Finance Research

2. 2025: The Year to Diversify Across Asset Classes

Mitigate risks by allocating investments across large-cap equities, short-term bonds, and gold.

Asset Class

Outlook 2025

Key Drivers

Risk Factors

India Large Cap EquityRisk Rating 2/5
Positive
  • Revival in rural consumption driven by good monsoon, increase in MSP and fall in agriculture cost inflation.
  • Moderation in inflation towards RBI's target of 4% boosting consumer spending.
  • Clean corporate and banking sector balance sheets providing foundation for growth.
  • Government's planned capex in H2FY25 to benefit infrastructure and capital goods sectors.
  • Rupee depreciation pressure due to strengthening USD and investor capital outflow.
  • Weak global growth affecting export-oriented sectors.
India Mid, Small and Micro Cap EquityRisk Rating 5/5
Negative
  • Strong domestic manufacturing push through PLI schemes benefiting mid and small-sized   manufacturers.
  • Historically high valuations with mid- and small-cap indices trading at premiums of 41% and 8%, respectively, to their long-term medians.
  • Greater exposure to slowing urban discretionary consumption.
  • Higher sensitivity to FII flows which could be impacted by US yields.
US EquityRisk Rating 3/5
Neutral
  • Pro-growth measures including potential tax cuts and deregulation boosting corporate earnings.
  • Resilient consumer spending supported by tight labour market and strong household balance sheets.
  • Improvement in fiscal health through proposed federal spending reductions, even if modest compared to targeted $2 trillion cuts.
  • High fiscal deficit and historic levels of public debt constraining growth potential.
  • Elevated equity valuations with S&P 500 P/E ratio at 30.6, ranking in the 96th historical percentile.
  • Implementation of aggressive trade tariffs triggering inflationary pressures.
  • Shallower rate cut cycle than market expectations due to sticky inflation.
China EquityRisk Rating 2/5
Positive
  • Comprehensive stimulus package including monetary easing and fiscal expansion with deficit reaching 4% of GDP.
  • Attractive valuations with Chinese equities trading at significant discounts compared to global peers.
  • Strong policy support for new growth sectors including semiconductors, EVs, AI and advanced manufacturing.
  • GDP growth slowing to 4.0-4.5% in 2025 due to potential US tariff implementation.
  • Persistent property sector challenges with new home sales and completions down by more than 50% from peak levels in 2021.
  • Structural headwinds including aging demographics and weak consumer confidence.
India Ultra Short (<1 year) and Short Term (1-3 year) BondsRisk Rating 
1/5
Positive
  • Expected rate cuts of 50-75 bps in 2025 starting from Feb-25, boosting bond prices.
  • Strong foreign inflows due to inclusion in global indices(JPMorgan, Bloomberg, FTSE Russell).
  • Market liquidity turning into deficit mode affecting short-term rates.
India Medium/ Long Term Bonds (>3 years)Risk Rating 2/5
Positive
  • Improving fiscal metrics with the government shifting to debt-based targeting from fiscal deficit targeting.
  • Strong foreign inflows due to inclusion in global indices(JPMorgan, Bloomberg, FTSE Russell).
  • Clean corporate balance sheets at 15-year low debt-equity ratios supporting credit quality.
  • US fiscal expansion and trade policies potentially reigniting inflation there, leading to higher Treasury yields.
  • Narrowing India-US bond yield spread impacting foreign investment flows amid USD strength.
GoldRisk Rating 
1/5
Positive
  • Preference by central banks for gold over USD for FX reserves, with projected net buying of 450 metric tonnes in 2025.
  • Higher inflation expectations in US due to potential trade tariffs and expansionary fiscal policies.
  • Geopolitical tensions in Middle East and Eastern Europe driving safe-haven demand.
  • Moderately loose monetary  policy in China supporting prices.
  • Adoption of Bitcoin as strategic reserve by developed countries potentially diverting investment flows.
  • Potential gold sales by Russia (holding 2,336 metric tonnes) due to economic challenges.
India Residential Real EstateRisk Rating 2/5
Positive
  • Expected 50-75 bps rate cuts in 2025 improving home loan  affordability,  particularly in the end-user and affordable-mid segment categories.
  • Rapid growth in peripheral areas around metro cities due to improved infrastructure and connectivity.
  • Increasing  demand from HNIs and NRIs in luxury segment driving premium valuations, supported by depreciating rupee and rising disposable incomes.
  • High inventory levels in major metropolitan areas impacting price appreciation.
  • Market consolidation favouring established developers over smaller players.

3. Valuation Divergence in Indian Equities Should Reduce

Large-cap, with reasonable valuations, are expected to outperform overvalued mid/small-cap (41% and 8% premiums).

Source: CMIE Economic Outlook,1 Finance Research

4. Select Sectoral Themes to Perform Better

Banking, infrastructure, and pharma sectors to thrive on domestic demand and government capex.

Source: CMIE Economic Outlook,1 Finance Research

5. Rupee Depreciation to Continue in Near-term

Strengthening USD and FPI outflows, driven by US inflation, to pressure the rupee.

Source: CMIE Economic Outlook,1 Finance Research

6. DII Inflows Unlikely to Maintain Past Momentum

DII inflows have been quite strong in a largely unidirectional Indian stock market since 2020. But when markets consolidate, DII flows become negative.

Source: CMIE Economic Outlook,1 Finance Research

7. Government's Infrastructure Push Drives Recovery

Investments in roads, railways, and urban development have boosted jobs and thus, driven consumption to pre-COVID levels.

8. Banking Sector Health Supports Growth Momentum

Historic low NPAs and 50-75 bps rate cuts to enable banks to fund private sector growth.

Source: CMIE Economic Outlook,1 Finance Research

9. Manufacturing Sector Ready for Capex Cycle

Low debt-to-equity ratios and PLI schemes to spur manufacturing expansion.

Source: CMIE Economic Outlook,1 Finance Research

10. Agriculture Recovery to Drive Rural Growth

Above-normal monsoons and strong Rabi sowing to yield 4%+ agricultural growth, curbing food inflation.

Source: CMIE Economic Outlook,1 Finance Research

11. US Market Rally Faces Multiple Stress Tests

S&P 500’s high P/E (30.6x) and potential trade tariffs risk derailing US equity gains.

Source: CMIE Economic Outlook,1 Finance Research

12. China's Growth Revival Hinges on Policy Support

China's equity market presents a compelling opportunity in 2025, driven by aggressive policy measures to combat deflation and revive growth. Stimulus and focus on semiconductors, EVs, and AI to aid growth, despite property sector woes.

Source: World PE Ratio,1 Finance Research

13. India Short-Term Bonds to Lead Rate Cut Rally

Expected 50-75 bps repo rate cuts to drive yields in short-term bonds (1-3 years).

Source: Federal Reserve Economic Data(FRED), CMIE Economic Outlook, 1 Finance Research

14. Gold Set to Benefit from Rate Cut Cycle

Gold to outperform equities, supported by central banks’ 400 MT annual reserve additions.

Source:  World Gold Council, 1 Finance Research

15. Rising Incomes and Rate Cuts to Drive Residential Prices

Strong demand and lower rates to fuel real estate price appreciation in top cities.

Source: CRE Matrix, NHB, 1 Finance Research
The CAGR returns for each phase are written in blue

Looking Ahead

India’s macroeconomic outlook for 2025 paints a promising picture of recovery, driven by moderating inflation, robust rural consumption, and a revitalised manufacturing sector. While global uncertainties like US trade policies and market volatility pose challenges, India’s strong domestic fundamentals and policy support provide a solid foundation for growth. Investors can capitalise on opportunities in large-cap equities, short-term bonds, and gold by adopting a diversified approach. 

For a deeper dive into the 15 key views and detailed analysis, explore the full Macroeconomic Outlook 2025 report here.

FAQ's

India is expected to enter a recovery phase in 2025, with GDP growth driven by moderating inflation (4-5%), robust rural consumption, and manufacturing capex, potentially surpassing Japan as the fourth-largest economy

Large-cap equities, short-term bonds (1-3 years), and gold are recommended for 2025 due to their strong performance, attractive yields, and diversification benefits amid global uncertainties.

Expected RBI repo rate cuts of 50-75 basis points will boost short-term bond yields and support equity sectors like banking and infrastructure, while gold may outperform during this transition.

Large-caps offer reasonable valuations and stability compared to mid- and small-caps, which face high valuations (41% and 8% premiums) and sensitivity to FII outflows and global growth risks.

US trade tariffs, China’s slowing growth (4.0-4.5% GDP), and elevated US equity valuations could trigger FPI outflows and rupee depreciation, impacting India’s export sectors and market volatility.

Disclaimer: The information provided in this blog is based on publicly available information and is intended solely for personal information, awareness, and educational purposes and should not be considered as financial advice or a recommendation for investment decisions. We have attempted to provide accurate and factual information, but we cannot guarantee that the data is timely, accurate, or complete. India Macro Indicators or any of its representatives will not be liable or responsible for any losses or damages incurred by the readers as a result of this blog. Readers of this blog should rely on their own investigations and take their own professional advice.