India's economy is under pressure due to slowing domestic demand.

The Indian rupee has weakened slightly, driven by continued capital outflows and investor expectations that the Reserve Bank of India (RBI) will cut interest rates. Inflation has fallen to 5.5% in November, as anticipated, returning to the RBI’s target range. Market predictions suggest the central bank may implement its first rate cut in the third quarter of 2025. Meanwhile, GDP growth shows signs of slowing, mirroring the decline in domestic demand.

India’s GDP grew by 5.4% year-on-year in the third quarter, down from 6.7% in the previous quarter and significantly below the market's expectation of 6.5%. This marks the slowest growth since 2022, signaling a loss of momentum after a period when India was the fastest-growing major economy in the world. The slowdown is attributed to a sharp decline in manufacturing sector growth, which fell to 2.2% compared to 7% in the previous quarter. However, strong growth in the agricultural sector provided a positive spillover effect on related industries.

The Reserve Bank of India kept its interest rate unchanged at 6.5% for the 11th consecutive meeting in December. This decision aligns with the broader economic slowdown. Additionally, the central bank reduced the cash reserve ratio (CRR) by 50 basis points to 4%, marking the first reduction since 2020. This move aims to boost liquidity in the economy ahead of the outflow of some funds for advance tax payments.

Indian banks have projected GDP growth of 6.6% for the upcoming year, with inflation expected at 4.8%, slightly above the previous forecast of 4.5%. Additional economic support measures are anticipated, potentially from Governor Shaktikanta Das, whose term ends later this month.

India’s manufacturing PMI rose to 57.4 in December from 56.5 in November, indicating robust end-of-year manufacturing activity. The growth was driven by a surge in new orders and exports, prompting companies to increase hiring and pushing employment levels to record highs. Rising demand also reduced overall inventory levels, which, in turn, contributed to rapid price increases.

Similarly, the services PMI rose to 60.8 in December from 58.4 in November, marking 41 consecutive months of growth in the services sector and the fastest expansion since August. This growth was fueled by consistently improving demand, reflected in a sharp rise in new orders. As a result, companies were compelled to expand their workforce to manage the increased workload, creating opportunities for business growth. However, raw material cost pressures remain a challenge, but higher sales volumes have allowed businesses to increase their profitability.