India’s rating upgrade set to give boost to foreign funds, say experts

FPI inflows

India is expected to attract stronger foreign funds after a sovereign credit ratings upgrade by S&P Global Ratings, which will enhance investor confidence, lower borrowing costs and make the country more attractive as an investment destination.

S&P Global on August 14 upgraded India's long-term sovereign credit ratings to “BBB” for the first time since 2007, citing economic resilience and fiscal consolidation.

“The ratings upgrade will be a positive for foreign flows into India, and lead to a stable currency atmosphere, thereby adding to the belief of lower financial market risks for India,” said Indranil Pan, Chief Economist, Yes Bank said.

Vishal Goenka, co-founder of IndiaBonds.com, said a higher credit rating systematically gets more investments into a country, as risk-adjusted returns are better.

S&P had in May 2024 upgraded India’s outlook to “positive” from “stable”, 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.

The ratings upgrade by the global rating agency signals a stronger sovereign credit profile, which typically results in a lower risk premium on debt, making Indian assets more attractive to yield-seeking global investors.

“We see India remaining in the global spotlight for Emerging Market favourable asset allocation and bond yields to fall in the short term,” Goenka said.

Radhika Rao, executive director and senior economist at DBS Bank, said the upgrade will help reduce funding costs for Indian firms borrowing overseas.