Indian bond yield eases after S&P upgrades India's rating to 'BBB'

The ratings agency said that the stable outlook reflects continued policy stability and high infrastructure investment will support India's long-term growth prospects. That along with cautious fiscal and monetary policy that moderates the government's elevated debt and interest burden will underpin the rating over the next 24 months.

The upgrade of India reflects its buoyant economic growth, against the backdrop of an enhanced monetary policy environment that anchors inflationary expectations. Together with the government's commitment to fiscal consolidation and efforts to improve spending quality, we believe these factors have coalesced to benefit credit metrics, S&P said in a release.

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," said S&P.

"We believe the effect of US 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," S&P added.

Bond yields have been on the rise since the Reserve Bank of India (RBI) kept policy rate unchanged in the August monetary policy. Though the decision was in line with the market expectation, few participants expected a surprise rate cut.