No immediate upgrade of India's sovereign rating: Moody's after Budget 2025

While India is making strides toward fiscal discipline and inflation control, Moody's maintains that for a rating upgrade, a substantial reduction in the debt burden is essential

Moody's Ratings has ruled out an immediate upgrade of India's sovereign rating, despite the government's efforts to manage its finances prudently and the proposal to reduce fiscal deficit to 4.4 per cent of GDP in FY26 in the Budget.

"While we view the government's sustained fiscal discipline and narrower fiscal deficits as credit positive, we don't expect these improvements in the debt burden or 'debt affordability' to be enough to trigger a sovereign rating upgrade at this time," Christian de Guzman, Senior Vice President, Moody's Ratings, told PTI in an interview on Saturday. 

Moody's currently maintains India's sovereign rating at "Baa3" with a stable outlook, which is the lowest investment-grade rating.

Finance Minister Nirmala Sitharaman, in her Budget speech, projected the fiscal deficit for FY25 at 4.8 per cent of GDP and 4.4 per cent for FY26.

While India is making strides toward fiscal discipline and inflation control, Moody's maintains that for a rating upgrade, a substantial reduction in the debt burden and more significant revenue-generating measures are essential.

Despite recent improvements, the fiscal deficit and debt-to-GDP ratio remain wider than pre-pandemic levels, with debt servicing costs continuing to take up the largest portion of the budget, even surpassing infrastructure spending. To secure a rating upgrade, significant improvements in both the debt burden and debt affordability are necessary.

It is not merely narrower fiscal deficits,"but material improvements in the debt burden and debt affordability" that will help in triggering a rating upgrade, Guzman emphasised.

He said that Moody's assesses debt affordability by examining metrics like interest payments as a percentage of revenue. Even though the debt has reduced slightly in recent years, the high interest payments remain a burden.

At the same time, he said the debt servicing costs that are associated with this high debt burden continue to be the largest portion of the budget, even higher than infrastructure spending.

Despite weaker-than-expected growth in recent quarters, Moody's maintains a favourable growth outlook for India compared to other economies.

"Over the past couple of quarters and on a forward looking basis, over the next one to two fiscal years, we still expect India to be one of the fastest growing, if not the fastest growing, G20 economy," Guzman said.

He acknowledged that India's inflation-targeting framework is relatively new compared to other Asian economies like Thailand, Indonesia, and the Philippines. Nevertheless, India has made notable progress in controlling average inflation during the inflation-targeting period, compared to prior years.

"Core inflation seems to be relatively well anchored, but nevertheless, inflation in India is subject to external shocks, such as the oil, oil prices, forex volatility, and probably most importantly, food price volatility, which is probably more subject to developments that don't relate to monetary policy, such as inclement weather and climate change," he added.