Global rating agency Moody's has projected that emerging markets including India are approaching 2026 with stable growth patterns but increasing susceptibility to geopolitical conflicts, climate disruptions, and inconsistent investment flows. In its comprehensive emerging markets outlook released Tuesday, the agency cautioned that the coming year will critically test the resilience of governments and corporations across Asia, Latin America, and Africa.
India's Growth Trajectory Amid Global Uncertainties
Moody's Ratings anticipates India's economic expansion to maintain a steady pace of 6.5% through 2027, according to a separate report published last week. This projection compares with an estimated 6.4% growth in calendar 2026 and 7% in 2025. The rating agency emphasized that government-driven capital expenditure and robust household consumption will continue to fuel India's economic engine, even as private investment remains cautious.
The agency noted that while many developing economies have successfully absorbed the impact of tighter global financial conditions, the next phase of risk will "increasingly be driven by local factors". These include political transitions, fiscal limitations, and escalating weather-related threats that could undermine economic stability.
Geopolitical Tensions and Trade Fragmentation
Moody's highlighted that emerging market governments are concentrating on domestic priorities while simultaneously strengthening cross-border relationships to navigate tariff disputes, US-China tensions, and other geopolitical pressures. "Elections in a number of EMs bring the potential for policy changes," Moody's observed, adding that societal opposition to existing and new policies is pushing some governments to prioritize social stability over long-term structural reforms.
Trade fragmentation is expected to intensify as tariff disputes and strategic competition between major powers accelerate supply chain realignment. "Credit conditions in emerging markets will be shaped by a more inward and populist shift in policy making across major economies, affecting trade and cross-border financial flows," the report stated. In response to US-imposed tariffs, emerging markets are diversifying trade relationships by negotiating bilateral agreements with the United States, strengthening ties with China, and establishing new or updated partnerships with the European Union.
Climate Risks and Investment Patterns
Climate vulnerability remains the most persistent challenge for the Asia-Pacific region. Moody's pointed out that Asia-Pacific sovereigns face substantial exposure to physical climate hazards including cyclones, floods, and heat stress, which gradually threaten credit quality by straining public finances and damaging critical infrastructure. Limited fiscal capacity, particularly in South Asia, continues to hamper adaptation initiatives.
Meanwhile, artificial intelligence and cloud computing are reshaping capital flows across Asia, sparking rapid growth in data-center investments. Moody's noted that AI-driven demand will significantly increase requirements for data center capacity, transforming infrastructure priorities from Singapore to Mumbai, though these new investments are unlikely to be evenly distributed.
Despite mounting challenges, emerging markets are entering this period with more balanced macroeconomic fundamentals compared to previous crises. "GDP growth is broadly steady if subdued, and inflation is easing," the rating company affirmed. Domestic demand for goods and services remains strong, trade connections are diversified, and monetary policy frameworks have gained credibility in many large emerging economies.
Investor appetite for emerging market debt is evident in narrowing credit spreads, bond issuance growth, and consistent capital inflows. Corporate and sovereign default rates in emerging markets are declining under these supportive conditions, with the corporate default rate expected to remain near pre-pandemic levels over the next twelve months according to baseline projections.
