A strong dollar and rising oil prices fanned fears of a slowdown in India, one of the fastest-growing major global economies. After gaining about 20% from early June to late September last year, Nifty 50, which represents the 50 largest Indian companies listed on the National Stock Exchange, reversed course, falling about 13% since then.

Primary challenges arise from external headwinds like unpredictable economic policies under President-elect Trump, limited room for U.S. interest rate cuts and increased foreign investment outflows.

Strengthening Dollar Delivers the Hardest Blow

A strengthening greenback hit hard the developing economy, pushing foreign portfolio investors to sell over $4 billion worth of India’s assets so far in January, following nearly $11 billion in withdrawals last quarter, according to Reuters. 

Growing skepticism by foreign portfolio investors toward India’s securities, coupled with uncertainty over Trump's planned policies, has prompted speculators to ramp up bearish bets on the Rupee and led investors to push back expectations of a February rate cut by the Reserve Bank of India (RBI).

The rupee could slide further as the outlook for the greenback's appreciation strengthens, fueled by rising yields and expectations of fewer interest rate cuts by the Fed. India's rising external debt, coupled with a strengthening greenback, puts pressure on the country's economy. India’s external debt-to-GDP ratio, now stands at 19.4% as of September last year.

India's external debt rose to $711.8 billion by the end of September 2024, reflecting a 11.72% increase from $637.1 billion in September 2023, according to the country’s Finance Ministry, as quoted on CNBCTV18. The report highlighted that greenback-denominated debt constituted the largest share of India's external debt, accounting for 53.4% as of September 2024.

India’s Growth Prospects Losing Momentum

The National Statistics Office (NSO) revised downward its annual growth forecast to 6.4% for the year ending in March, as quoted on Reuters, marking the slowest pace of growth in four years, due to a weakened manufacturing sector and slower corporate investments. Initially, a growth rate of 6.5%-7% was estimated.

India’s central bank, the RBI, revised its growth forecast for the year ending March 2025, lowering it to 6.6% from the previous estimate of 7.2%. The central bank stated that sticky inflation in the country played a strong hand in its downward growth forecast.

Last November, Bank of America also revised India’s GDP growth forecast for the fiscal year ending March 2025, lowering it to 6.5% from its previous estimate of 6.8%, per CNBC. Bank of America forecasts a recovery for the economy in 2025 but the strength and pace of the recovery remains uncertain.

IMF Managing Director Kristalina Georgieva, as quoted on Business Standard, estimates the Indian economy to be slightly weaker in 2025, despite steady global growth. In its report, as quoted on by CNBCTV18, the UN revised its growth forecast for India, lowering expectations for 2025 compared to 2024. The UN now anticipates the developing nation to grow by 6.6% this year. However, in its report, the UN does keep a positive tone.

Bleak Economic Indicators Raise Alarm

According to Reuters, private investment growth is projected to slow to 6.4%, compared to 9% in the prior year. Additionally, manufacturing, representing about 17% of GDP, is forecasted to grow at 5.3% in 2024-2025, significantly lower than the 9.9% growth seen last year.

Construction output is expected to expand by 8.6%, down from 9.9% in the previous fiscal year. According to CNBCTV18, key GDP contributors, including trade and hotels as well as financial services and real estate, are also expected to exhibit slower growth.

Is There a Glimmer of Hope Amid Economic Woes?

Per Yahoo Finance, investors are estimating India to record another quarter of sluggish economic growth. Additionally, according to a Bloomberg survey, India’s benchmark Nifty 50 index is forecast to drop further by 5% in the three months leading up to March. However, there is a glimmer of hope for the South Asian economy amid hurdles.

With President-elect Trump’s proposed tariffs on Chinese imports and the potential for a trade war between the two economies, India stands to benefit from the changing trade landscape, as companies shift manufacturing to India to avoid tariffs. Apple serves as a prime example of companies relocating manufacturing to India.

Despite high inflation in the country, the recent year-on-year fall in annual inflation for the second straight month provides the RBI with more room to cut rates, amid slowing economic growth.

ETFs to Consider

Against this backdrop, investors with high risk tolerance may take the opportunity and employ a “buy-the-dip” approach with India-focused funds, while others should maintain caution and can consider their exposure to the country in the short term.

Investors can consider funds like iShares MSCI India ETF (INDA Quick QuoteINDA - Free Report) , WisdomTree India Earnings Fund (EPI Quick QuoteEPI - Free Report) , Franklin FTSE India ETF (FLIN Quick QuoteFLIN - Free Report) , iShares India 50 ETF (INDY Quick QuoteINDY - Free Report) and First Trust India NIFTY 50 Equal Weight ETF (NFTY Quick QuoteNFTY - Free Report) .