S&P Global Ratings has raised the country’s sovereign rating outlook to ‘positive’ from ‘stable’ while retaining the rating at ‘BBB-‘. The rating agency cited India’s robust economic expansion as having a constructive impact on its credit metrics.
“We expect sound economic fundamentals to underpin the growth momentum over the next two to three years,” S&P said in its assessment on Wednesday. The agency added that regardless of the outcome of the ongoing national elections, it expects broad continuity in economic reforms and fiscal policies.
The positive outlook on India’s sovereign rating is predicated on its robust economic growth, pronounced improvement in the quality of government spending, and political commitment to fiscal consolidation, according to S&P. “We believe these factors are coalescing to benefit credit metrics,” the analysts wrote.
The Indian rupee strengthened, while the benchmark 10-year bond yield eased three basis points to 6.99% after the outlook upgrade.
S&P acknowledged that India’s weak fiscal settings had always been the most vulnerable part of its sovereign ratings profile, with elevated fiscal deficits, a large debt stock, and interest burden persisting. However, the agency noted that the government is prioritizing ongoing consolidation efforts.
“With economic recovery now well on track, the government is again able to depict a more concrete (albeit gradual) path to fiscal consolidation,” the S&P analysts said.
The rating agency projects India’s general government deficit to gradually decline from 7.9% of GDP in fiscal 2025 to 6.8% by fiscal 2028. It expects the Indian economy to expand at close to 7% annually over the next three years, which should have a moderating effect on the ratio of government debt to GDP despite high fiscal deficits.
S&P also noted that India’s favorable GDP growth to interest rate differential is keeping government borrowing sustainable, adding that it expects the country’s debt to GDP ratio to reduce to 81% by fiscal 2028 from the current 85%.
The sustained deceleration in price growth has allowed the central bank to conclude its monetary tightening campaign, and S&P expects a moderately easier monetary policy stance before the end of fiscal 2025.
The agency stated that it may raise India’s ratings if fiscal deficits narrow meaningfully to bring down the general government debt to below 7% of GDP on a structural basis or if it observes a sustained and substantial improvement in the central bank’s monetary policy effectiveness and credibility, with inflation staying low on a durable basis.
Alternatively, S&P could revise the outlook to stable if it observes an erosion of political commitment to maintain sustainable public finances or if the current account deficits widen materially, weakening India’s external position.
(Inputs from Reuters)