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Informist, Friday, May 9, 2025

 

NEW DELHI – Toronto-based Morningstar DBRS has upgraded India's long-term foreign and local currency issuer rating to BBB from BBB(low) and changed the outlook to 'stable' from 'positive'. India's short-term foreign and local currency issuer ratings were upgraded to R-2 (high) from R-2 (middle) with a 'stable' outlook, the rating agency said in a release dated Thursday.

 

"The upgrade reflects Morningstar DBRS's view that the cumulative and ongoing benefits of India's structural reform efforts are facilitating fiscal consolidation and helping sustain India's high potential growth rate," the rating agency said. "The upgrade also reflects a more resilient banking system," it said. 

 

India's fiscal consolidation remains on track with improvement in transparency and quality of spending and the BBB credit rating balances the public finance challenges with the economy's high growth potential, Morningstar DBRS said. The Reserve Bank of India has projected the Indian economy to grow 6.5% in FY26.

 

India's fiscal space has historically been limited by its low revenue base and high non-discretionary expenditures, resulting in its poor score in the 'fiscal management and policy' building metric, the rating agency said. The Centre's fiscal deficit had jumped to 9.2% in 2020-21 (Apr-Mar) as the coronavirus pandemic hit incomes and pushed up the government's expenditure. Since then, the government has brought down its deficit levels and is projected at 4.4% in FY26. "Despite recent improvements, India's perennially large fiscal deficits and elevated government debt levels characterise the country's credit profile," it said. 

 

India's high level of public debt has often been cited as a constraint by rating agencies, leading to the government shifting focus to the debt-to-GDP ratio starting FY27. In the Budget for FY26, the Centre announced a plan to reduce the central government's debt-to-GDP ratio to 50% by March 2031, within a band of 100 basis points from 57.1% in FY25. The government said it would keep its annual fiscal deficit each year such that the debt metric declines in line with the path envisioned. Despite the high public debt ratio, which is around 82-83% currently, Morningstar DBRS believes the risks to debt sustainability are relatively low.

 

The government has ramped up its capital expenditure, which is credit positive since it bodes well for medium-term growth and positively influences the assessment of the "fiscal management and policy" building metric, the rating agency said.

India's credit rating can be improved if it continues to implement reforms that raise the investment rate and improve medium-term growth prospects, and if it makes a material reduction in the public debt-to-GDP ratio, Morningstar DBRS said. The rating, on the other hand, can be downgraded if the debt-to-GDP ratio materially increases over the medium term, or if there is a weakening in the country's macroeconomic policy framework, it said.

 

The country's macroeconomic balances look healthy with inflation returning to the central bank's tolerance band of 2-6%, it said. Though US President Donald Trump's reciprocal tariffs have triggered a disruption to global trade, "India looks to be comparatively well-positioned, given the relatively closed nature of the Indian economy," the rating agency said.

 

Morningstar DBRS said it is closely monitoring recent developments on the border and expects the tension to remain contained within the region and does not anticipate a meaningful impact on India's medium-term growth prospects or creditworthiness.   End

 

Reported by Priyasmita Dutta

Edited by Saji George Titus

 

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