Fitch affirms India's rating at BBB- with stable outlook, Trump tariffs would be 'negotiated lower'

Fitch: India's demand growth is seen solid, aided by government capex and private consumption

Fitch Rating has affirmed India's credit rating at BBB- with a stable outlook, projecting a robust FY26 growth of 6.5 percent on the back of GST and other reforms, though the debt burden will be a reason for credit weakness, the credit rating agency said on August 25, adding that Trump's tariffs will be eventually 'negotiated lower'.

Fitch added that India's ratings are supported by its 'robust growth and solid external finances', with growth along with macro stability and improving fiscal credibility set to drive a steady improvement in its structural metrics, including GDP per capita. This, Fitch added, can increase the likelihood that India's debt can trend 'modestly downward' in the medium term.

Tariff Risks

US President Trump's tariffs on India are a 'moderate downside risk' to Fitch's forecast, and add to the uncertainty, though it believes the 50 percent tariff on New Delhi will 'eventually be negotiated lower'.

"US tariffs are a moderate downside risk to our forecast but are subject to a high degree of uncertainty. The Trump administration is planning to impose a 50% headline tariff on India by 27 August, although we believe this will eventually be negotiated lower," Fitch Rating said.

"The direct impact on GDP will be modest as exports to the US account for 2% of GDP, but tariff uncertainty will dampen business sentiment and investment," Fitch said. The note added that India's ability to benefit from the China+1 shift would be 'reduced' if Trump's tariffs on India remain above those of Asian peers. However, the proposed goods and services tax (GST) reforms, should support consumption and offset growth risks, it added.

GST and Other Reforms 

Fitch said it sees a potential GDP growth of 6.4%, driven by public capex, revival in private investment and favourable demographics. "The government's deregulation agenda and GST reforms should support incremental growth. Passage of other significant reforms, especially on land and labour laws, seems politically difficult," Fitch added, though it said that some states are likely to speed up such reforms. Despite the bilateral trade agreements, India's trade barriers still remain relatively high, Fitch added.

Demand Outlook

Fitch said that India's economic outlook remains 'strong' compared to its peers, even though the growth momentum has moderated in the past two years. "Domestic demand will remain solid, underpinned by the ongoing public capex drive and steady private consumption. However, private investment is likely to remain moderate, particularly given heightened US tariff risks," the note added.

Credit 'Weakness'

The note said that India's fiscal metrics are a 'credit weakness', with high deficits, debt and debt service compared with 'BBB' peers. The lagging structural metrics of governance indicators and GDP per capita too are a constraint on the rating.

Factors for Upgrade

Fitch cited two key factors that could lead to a rating upgrade going forward, which are: sustainability of high medium-term growth along with an improved private investment cycle, and a commitment to keep government debt on a steady downward trend.

Risk of Downgrade

On the other hand, two factors are key risk to a downgrade, i.e., a stalled fiscal consolidation or a rise in government's debt/GDP ratio, or a weaker GDP growth outlook that weighs on the debt trajectory.

Fiscal Health

Fitch sees a modest deficit reduction going forward, declining to 4.4% of GDP in FY26, which may start to slow down from next fiscal, with a fall to 4.2% of GDP in FY27 and 4.1% in FY28. "Capex is likely to stay high and the current Pay Commission review will increase civil servant salaries amid more limited space for subsidy cuts and the potential for slightly revenue-negative GST reforms," Fitch added.