S&P upgrades India's credit rating to 'BBB' after 18 years, outlook stable

Upgrades by a notch to BBB amid US tariff jitters; FinMin says it's an affirmation of fiscal management

S&P Global Ratings on Thursday raised India’s long-term sovereign credit rating by one notch to BBB from the lowest investment grade of BBB-, with a stable outlook. This is the country's first sovereign upgrade by S&P in 18 years. 

S&P cited India’s economic resilience, sustained fiscal consolidation, and improved quality of public spending. The move places India in the same rating category as countries like Mexico, Indonesia, and Greece. 

The upgrade comes days after US President Donald Trump imposed a 50 per cent tariff on Indian goods and called the country a “dead economy”. Analysts said the upgrade is expected to widen India’s appeal to global investors. 

 

Noting that India remains among the world’s best-performing economies, S&P said: “The upgrade reflects India’s buoyant economic growth, against the backdrop of an enhanced monetary policy environment that anchors inflationary expectations.” 

The Ministry of Finance welcomed the move and said India had prioritised fiscal consolidation while maintaining a strong infrastructure push and an inclusive growth approach. “India will continue its buoyant growth momentum and undertake steps for further reforms to attain the goal of Viksit Bharat by 2047,” it added. 

The 10-year bond yield declined to 6.38 per cent before settling at 6.40 per cent for the day, the steepest single-day drop in yields in two months. The rupee trimmed some losses after the rating upgrade announcement to close at 87.56 against the dollar. 

“Though the US is India’s largest trading partner, we do not expect the 50 per cent tariffs (if imposed) to pose a material drag on growth. Though this may eventually result in a one-off hit to growth, we envisage the overall impact to be marginal and will not derail India's long-term growth prospects,” it added. 

Sonal Varma, chief economist (India and Asia ex-Japan) at Nomura Holdings, said the upgrade was a boost for sentiment amid negative headlines about US tariffs.

 

“It’s an acknowledgment of India’s credible fiscal and monetary policy frameworks and their role in promoting macro stability. The impact on flows purely from the rating upgrade may not be much, since the other two rating agencies still have India’s sovereign rating one notch lower and with a stable outlook,” she said.

 

Both Fitch Ratings and Moody’s have maintained the lowest investment grade for India with stable outlook.

 

S&P said India’s credit metrics have benefited from the government’s commitment to fiscal consolidation and efforts to improve spending quality. It forecasts real gross domestic product (GDP) growth of 6.5 per cent this financial year, backed by “solid consumer and public investment dynamics”.  “We expect policy continuity post-elections (states), which would support further economic reforms and fiscal consolidation,” it said.

 

The agency cautioned that it could lower the ratings if it observes an erosion of political commitment to consolidate public finances. “In addition, downward pressure could also come from India’s economic growth slowing materially on a structural basis such that it undermines fiscal sustainability,” it added. 

 

In the upside scenario, S&P said it could raise the ratings if fiscal deficits narrow meaningfully, such that the net change in general government debt falls below 6 per cent of GDP on a structural basis.

 

Projecting the general fiscal deficit to decline to 7.3 per cent of GDP in FY26 and to 6.6 per cent by FY29, S&P said the government’s weak fiscal performance and burdensome debt stock and low GDP per capita were the challenges to its sovereign ratings.

 

S&P said India’s favourable GDP growth to interest rate differential has kept government borrowing sustainable, and it expects this to continue. “We project the ratio of net general government debt to GDP to decline to 78 per cent by fiscal 2029, from 83 per cent in fiscal 2025. This brings India back closer to its pre-pandemic debt level and well below the pandemic peak of 91 per cent of GDP,” it added.

 

The rating agency noted that India’s pace of fiscal consolidation trails that of regional peers at a similar rating level despite strong revenue gains, which were partially offset by the rise in government expenditure.

 

However, supported by large dividends from the Reserve Bank of India, healthy GST receipts, and potential capital underspending, S&P expects the government to meet its deficit target in FY26 despite revenue loss from lifting the threshold for minimum taxable income and slower economic growth.

 

The Union Budget has set a target to bring down the central deficit to 4.4 per cent of GDP for FY26 from the provisional deficit of 4.8 per cent in FY25.

 

S&P noted that India’s corporate and financial sectors have stronger balance sheets than before the pandemic. It said that more effective capex programmes, including greater participation by the private sector, will help alleviate a widespread shortfall in physical infrastructure and enhance the productive capacity of the economy.

 

“The success of the government in funding large infrastructure investment without substantially widening the country's current account deficit will be important,” it said. 

 

Through the looking glass

 

S&P Global Ratings has factored the government’s commitment to fiscal consolidation and efforts to improve spending quality, in its recent ratings upgrade. Even though it said that India’s weak fiscal settings had always been the most vulnerable part of its sovereign ratings profile, S&P believes that the country will meet its 4.4 per cent deficit target in FY26.  While acknowledging that India's recovery from its pandemic nadir has placed it among the best-performing emerging market economies in the world, S&P Global Ratings cautioned that the country’s high growth rates need to be sustained over a long period of time to create sufficient jobs, reduce inequality and reap the full benefit of its favourable demographics.