S&P Global Ratings has improved India’s sovereign rating outlook from “stable” to “positive,” retaining the rating at “BBB-,” which is a significant move. This upgrade is a result of India’s strong economic growth, which is positively affecting its credit metrics.
Key Factors Behind the Upgrade
S&P Global Ratings highlighted several factors contributing to this positive outlook:
- Robust Economic Growth: Over the next two to three years, India’s robust economic fundamentals are expected to sustain its growth momentum. S&P projects that throughout this time, India’s GDP will grow at a rate of around 7% a year.
- Economic Reforms and Fiscal Policies: S&P expects that financial and economic reforms will primarily keep going, regardless of the results of the election. For the economy to continue growing and becoming stable, this constancy is essential.
- Improvement in Government Spending : The standard of government spending has risen significantly. Despite ongoing budget deficits and an enormous debt stock, the government is giving fiscal reduction measures the highest priority.
- Monetary Policy: The Reserve Bank of India (RBI) has been able to wrap up its monetary tightening campaign because of the slowdown in price increases. S&P expects that before the end of the fiscal year 2025, monetary policy will be slightly weaker.
Positive Economic Indicators
- Fiscal Consolidation: According to S&P’s projections, by fiscal 2028, the overall government deficit is expected to drop from 7.9% of GDP in fiscal 2025 to 6.8%.
- Debt to GDP Ratio: The agency predicts that India’s debt to GDP ratio will drop from the current 85% to 81% by fiscal 2028.
- Sustained Growth: The ratio of government debt to GDP is expected to decrease as a result of the projected economic growth.
Market Reaction and Government Response
The outlook improvement was well received by the Indian rupee, as seen by the benchmark 10-year bond rate falling three basis points to 6.99%. The increase was welcomed by Finance Minister Nirmala Sitharaman, who said it demonstrated India’s strong growth record and optimistic economic future.
Ajay Seth, the secretary of economic affairs, was upbeat about potential relationships with S&P in order to highlight the durability of the Indian economy and the possibility of more rating upgrades.
Potential for Future Upgrades
If there is a significant reduction in budget deficits and a structural drop in general government debt below 7% of GDP, S&P said it may upgrade India’s ratings. An upgrade might also result from low inflation and an ongoing improvement in the central bank’s credibility and ability to implement monetary policy.
S&P warned that if the political will to uphold sustainable public finances wanes or if the current account deficits dramatically increase, undermining India’s standing abroad, it may be essential to alter the outlook to be stable.
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