How India's economy defied odds in 2025 — but external shocks left a mark

India's economy defied global headwinds in 2025, expanding 8.2% in Q2 FY26, up from 5.6% a year earlier, driven by consumption and infrastructure spending. The Reserve Bank of India cut rates by 125 basis points to 5.25% as inflation hit a historic low of 0.25% in October, creating a rare 'Goldilocks' scenario of high growth and low prices. Reforms like GST 2.0 (simplifying rates to 5% and 18%) and income tax relief (zero tax up to Rs 12 lakh) boosted domestic demand. However, external shocks emerged: the rupee weakened to near Rs 91 per dollar, Foreign Institutional Investors sold a record Rs 1.58 lakh crore in equities, and US tariffs on Indian goods rose to 50% in August. Trade deals with New Zealand and Oman were signed, but Mexico's new 50% tariffs on non-FTA partners threatened exports. India's trade deficit with Russia widened to $58.9 billion as crude imports surged, while US trade talks stalled over farm access. The economy enters 2026 with strong fundamentals but persistent external vulnerabilities.