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October 20, 2025 Indian Economy Navigates Inflation Ease, Trade Expansion, and Growth Debates

The Indian economy is currently experiencing a period of easing retail inflation, driven by lower food prices and the impact of recent GST reforms, which are also bolstering consumption. Discussions are underway regarding potential monetary policy easing with a possible RBI rate cut later this year. On the trade front, India is actively diversifying its export markets and engaging in crucial talks to expand trade agreements with ASEAN and Brazil, while a weaker rupee is enhancing export competitiveness. However, concerns persist about declining private capital formation and the long-term growth trajectory, with some economists highlighting the challenge of moving beyond a 'lower-middle income trap'.

Inflation and Monetary Policy Outlook

India's retail inflation is expected to ease further in October, supported by a high base effect, falling food prices, and the full impact of recent GST reforms. This positive trend has led to an eight-year low in inflation. The rationalization of GST rates is noted as a key factor in this moderation. In line with this, an MPC member has signaled scope for providing more monetary boost to growth, suggesting potential multiple rate cuts in FY26-FY27, citing low inflation and the need to support economic expansion. Goldman Sachs also forecasts an additional policy rate cut before the year-end, hinting that India may be nearing the end of its fiscal tightening phase.

GST Reforms Drive Consumption and GDP Expectations

The government highlighted that the GST 2.0 reforms, implemented on September 22, have led to a significant boost in consumption, particularly for electronics and consumer goods, and reduced prices for daily-use items. These reforms are anticipated to reflect positively in the GDP numbers for financial year 2025-26, with consumption expected to increase by over 10% in nominal terms this year. Finance Minister Nirmala Sitharaman affirmed that the benefits of GST rate cuts are reaching consumers, fostering increased purchases and driving investment.

Trade Expansion and Rupee Dynamics

India is making concerted efforts to broaden its trade horizons. Exports showed growth in 24 nations during April-September, indicating market diversification. The nation is also bullish on resolving outstanding issues related to its trade agreement with the 10-member ASEAN bloc, with a review of the 2010 trade pact likely to conclude by year-end as India aims to narrow its trade deficit. Furthermore, India and Brazil are in talks to expand their preferential trade agreement (PTA), targeting a bilateral trade value of US$20 billion by 2030. Meanwhile, the Indian rupee's real effective exchange rate (REER) fell to its lowest level since October 2018 at 97.13 in August, as the currency touched a record low of 88.14 against the US dollar. This undervaluation is expected to enhance export competitiveness by making Indian goods cheaper globally.

Investment, Growth Concerns, and Banking Sector Performance

While PE-VC deal value in India surged to US$26 billion in the first nine months of 2025, signaling robust investor confidence, former Finance Minister P. Chidambaram raised concerns on October 19, 2025, about India being "stuck in a lower-middle income trap." He pointed to a "dismal" average growth rate of 6.5% over several years and a significant decline in capital formation, with Gross Fixed Capital Formation (GFCF) dropping from 35.8% of GDP in 2007-08 to 30.1% in 2024-25. There are also concerns about rising unemployment, particularly among educated youth. In the banking sector, major players reported strong Q2 results, with HDFC Bank's net profit jumping 10.8% and ICICI Bank's rising by 5.2%. Emirates NBD is set to acquire a majority stake in RBL Bank in a significant Rs 26,850 crore deal. Credit growth also inched up to 11.4% in the October 3 fortnight.

Stock Market Update

The Indian stock markets will remain open on October 20, 2025, despite some states celebrating Diwali Lakshmi Puja. A special one-hour Muhurat trading session is scheduled for October 21 to mark the new Samvat year, a traditional ritual believed to bring prosperity. The markets will be closed on October 22 for Diwali Balipratipada.

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