Credit ratings agency S&P Global upgraded India's long-term sovereign credit ratings to 'BBB' for the first time since 2007 citing economic resilience and fiscal consolidation, a decision that has been welcomed by the government.
India’s ratings outlook was last upgraded to 'Positive' from 'Stable' in 2024, a change which was initiated after a decade when the outlook was raised from 'Negative' to 'Stable'.
The stable outlook reflects the view that India's continued policy stability and high infrastructure investment will support long-term growth prospects, S&P said. These fundamentals will underpin India's growth momentum over the next two to three years, the rating agency added.
Aside of the long-term sovereign credit ratings at 'BBB', India's short-term ratings has been upgraded to 'A-2' from 'A-3', with the outlook on the long-term rating remaining as stable.
Strong Growth Track Record
The report cited India's strong growth track record, especially after the pandemic that saw the GDP growth average 8.8 percent from FY22–FY24, which was the highest in Asia-Pacific.
"India remains among the best performing economies in the world. It staged a remarkable comeback from the pandemic with real GDP growth over fiscal 2022 (year-end March 31) to fiscal 2024 averaging 8.8%, the highest in Asia-Pacific. We expect these growth dynamics to continue in the medium term, with GDP increasing 6.8% annually over the next three years. This has a moderating effect on the ratio of government debt to GDP despite still-wide fiscal deficits," S&P Global said.
India's GDP is expected to see sustained growth of 6.8 percent every year over the next three years, S&P underscored, backed by consumer and public investment dynamics, which could propel the real GDP growth to 6.5 percent in FY26.
The Indian rupee strengthened to 87.58 against the dollar while the benchmark 10-year bond yield fell 7 basis points to 6.38% soon after the announcement.
Read More: Indian bond yield eases after S&P upgrades India's rating to 'BBB'
Manageable Impact of Tariffs
The note said the impact of US tariffs on India will be manageable, given the domestic focus of the economy. "We believe the effect of U.S. tariffs on the Indian economy will be manageable. India is relatively less reliant on trade and about 60% of its economic growth stems from domestic consumption. We expect that in the event India has to switch from importing Russian crude oil, the fiscal cost, if fully borne by the government, will be modest given the narrow price differential between Russian crude and current international benchmarks."
Given the exemption for certain categories, India's exports facing the tariff threat are a small part of the total GDP, S&P added. "Though the U.S. is India's largest trading partner, we do not expect the 50% tariffs (if imposed) to pose a material drag on growth. India's exports to the U.S. constitute about 2% of GDP. Factoring in sectoral exemptions on pharmaceuticals and consumer electronics, the exposure of Indian exports subjected to tariffs is lower at 1.2% of GDP."
Impact of Oil Import
On crude oil, S&P said it expects any fiscal cost on India to be modest, should it switch from importing Russian oil, given the 'narrow price differential' between Russian crude and current international benchmarks.
Infra Boost
S&P added that the quality of government's spending has improved in last 5-6 years, and India's capex is set to rise to Rs 11.2 trillion, or about 3.1% of GDP for FY26, compared to 2% of GDP a decade ago. If one adds capital spending by states, the total public investment in infrastructure is estimated at around 5.5% of GDP, which is 'on par or higher' than sovereign peers. "We believe the improvements in infrastructure and connectivity in India will remove chokepoints, which are hindering long-term economic growth," said S&P Global.
Outlook
India's ratings could be raised if the fiscal deficit narrow meaningfully, and government debt falls below 6 percent of GDP on a structural basis, said S&P Global. The rise in infrastructure capex will lift 'economic growth dynamism', combined with fiscal adjustments, it can alleviate India's weak public finances. On the downside, S&P said it may lower the ratings if there is an 'erosion of political commitment' to fiscal consolidation.
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