Home Country Report India: Fast Growth, Strong Fundamentals
Author: Rajesh Trichur Venkiteswaran | Photos: Shutterstock
India’s economy is expanding rapidly, and prospects are good. But external factors like the Iran conflict could slow it down.
This article appears in the July/August issue of Global Finance Magazine.
Few large economies match India’s growth potential, which is supported by robust domestic demand, a strong banking sector, and sound macroeconomic fundamentals.
But spillovers from the Iran war have added to inflationary pressure while worsening currency depreciation and foreign exchange outflows. The question is not whether India can grow, but whether it can sustain its growth trajectory amid external headwinds and achieve its potential.
Higher crude oil prices and rising logistics costs stemming from the latest Persian Gulf conflict are the most immediate challenges. India imports more than 85% of its crude, so even small price increases feed into the current account and increase the import bill.
Remittances act as a stabilizer against external shocks, but they are not immune to geopolitics. India remains the world’s largest recipient of remittances , with flows topping $135 billion in fiscal 2024-25, which ended in March of that year, accounting for 3% of GDP. A crisis in the U.S., U.K., EU, or Western Asia is enough to create ripple effects on a country’s external balance.
Yet, India is entering a period of macroeconomic strength . Inflation remains broadly contained at 3.9% as of May, and unemployment has stayed broadly stable in recent years, in the mid-single-digit range. Foreign exchange reserves stood at around $680 billion in March, May, and June, near record highs, and serve as a buffer against currency shocks without derailing growth, while supporting nearly one year of import cover.
India’s growth is most evident in its banking sector. After years of balance-sheet problems and a mounting inventory of bad loans, Indian banks are now in their strongest position in more than a decade. Non-performing assets have fallen to multi-decade lows, capital buffers remain comfortably above regulatory requirements, and balance sheets are well positioned to support credit growth.
Accordingly, Indian banks are attracting renewed interest from foreign investors. Sumitomo Mitsui Banking Corporation’s acquisition last year of a 24.9% stake in Yes Bank makes it the largest shareholder. Emirates NBD’s proposed acquisition of a stake in RBL Bank, pending approval later this year, is among the largest announced foreign-investor transactions in Indian banking.
India continues to attract long-term foreign direct investment (FDI), even as foreign institutional investors head for the exits. The divergence suggests that foreigners believe in India’s growth and are betting on the long term rather than the short term, which is susceptible to global liquidity cycles.
A major chunk of FDI in India continues to be routed through financial hubs, including Singapore (25%) and Mauritius (24%), reflecting tax efficiency, favorable double taxation treaties, and infrastructure for cross-border capital flows. The sectors with the highest recent equity inflows include services (financial, banking, and insurance); computer software; the automobile industry; telecommunications; and construction. As this suggests, AI, software, data centers, digital infrastructure, renewable energy, batteries, green hydrogen, and advanced manufacturing have…