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Informist, Thursday, Aug. 14, 2025

 

By Shubham Rana and Aaryan Khanna

 

NEW DELHI – It took S&P Global Ratings 18 years to upgrade India's sovereign credit rating, vindicating the country's half a decade of fiscal discipline, focus on high quality expenditure, and resilient economy.

 

S&P Global's rating upgrade to 'BBB' from 'BBB-' on Thursday puts India on par with other emerging market economies such as Indonesia and Mexico, opens the door for more global capital, and lowers the cost of capital in the medium term, economists said. In the near term, however, the rating upgrade is unlikely to be more than just a sentiment boost to India's financial markets, especially as India faces steep tariffs by the US, economists and market participants said.

 

S&P upgraded India's rating citing the economy's resilience and sustained fiscal consolidation. The ratings agency had raised its outlook on India's rating to 'positive' from 'stable' in May last year. The outlook now becomes 'stable' after the rating upgrade.

 

"The upgrade of India reflects its buoyant economic growth, against the backdrop of an enhanced monetary policy environment that anchors inflationary expectations," the ratings agency said. "Together with the government's commitment to fiscal consolidation and efforts to improve spending quality, we believe these factors have coalesced to benefit credit metrics."

 

Since the COVID-19 pandemic, the Indian government has focused on fiscal consolidation and spending on infrastructure. Having already sharply lowered its fiscal deficit to 4.8% in 2024-25 (Apr-Mar) from 9.2% in FY21, the government aims to reduce it to 4.4% of GDP this year.

 

The government balanced its fiscal discipline with capital investments during this period. It has increased capital spending to record highs of over INR 10 trillion from around INR 3 trillion before the pandemic. Government capital expenditure now makes up over 3% of GDP compared with 2?ecadeback. These factors helped shape India's journey to a better credit rating.

 

"We see this as the payoff from a decade of policy focus on strengthening the fiscal profile and macro stability, with sustained gains in both the external sector and domestic balance sheets," Madhavi Arora, chief economist at Emkay Global Financial Services, said. "Post-Covid, India's debt and fiscal deficit improvement has been among the best across EMs (emerging markets)," Arora said in a note. 

 

Kanika Pasricha, chief economic advisor at Union Bank of India, said that while in the near term the recovery in foreign portfolio investment flows will be led by a trade deal with the US and domestic policy dynamics, in the medium term, the key role of the rating upgrade will be to lower cost of capital, especially for global borrowings for the economy.

 

According to Arora, the overall reduced cost of capital from the rating upgrade will help India finance its fiscal and current account deficit, and could also "trigger positive externalities." "This is relevant as there is a fair risk of CAD crossing 1% of GDP in FY26 amid downside risk to exports of goods and services."

 

FOR THE MARKET

The government bond market had the biggest and best reaction to the news, with both foreign exchange and equity markets seemingly not fazed at the first asking. The benchmark 10-year gilt yield had its best day since Apr. 2 and fell 8 basis points to 6.40% at close on Thursday. Benchmark equity indices inched higher after the announcement, and the rupee gave up some losses, though it ended lower regardless. 

 

While some sections of the market had their ear out for a rating upgrade over the past few months, hoping for the change ever since S&P upped its outlook on India's rating, chatter in the market indicated that it broadly came as a surprise. Beginning with the Reserve Bank of India's Monetary Policy Committee meeting outcome on Aug. 6, the benchmark yield had at its worst risen nearly 18 bps to 6.51% in six sessions. Worries about fiscal expansion still dog bond traders' decisions, in spite of S&P's seal of approval on forecasting the Centre will meet its fiscal deficit aim of 4.4% of GDP. Uncertainty on further rate cuts and constant bond supply amid flagging demand had already driven bond yields up, and the "relief rally" came largely as a spurt of short covering. 

 

"It comes at a great time for the (bond) market, which needed the sentiment boost among a sea of negatives," the treasury head at a private sector bank said. "But beyond the reaction today (Thursday), I don't think it leads to an immediate influx of flows at the margin, or changes the dynamics for bonds or the rupee in the near term."

 

Foreign portfolio investors have been net sellers of fully accessible route government securities in the current fiscal year, and their purchases will follow the yield differential between US and India bonds rather than the rating upgrade, dealers said. The upgrade may elicit more confidence in India's bonds from foreign investors but it does not make India eligible for more global bond indices than it already was at the lowest rung of investment grade. Come September, however, traders will watch out for India's inclusion in Bloomberg's Global Aggregate index and its potential of $20 billion of inflows with renewed hope.

 

"It's a good sentiment boost and reflects the centre fiscal discipline over the last few years," said Gaura Sen Gupta, chief economist at IDFC FIRST Bank. "But actual FPI inflows into government bonds will still be a function of the gap between g-sec and US Treasury yields and sentiment towards emerging markets in general."

 

The rupee and equity markets remained worried about the impact of US tariffs on their markets in the near term. At the margin, the upgrade suggests foreign money flows into India more quickly in times of positivity, and the commentary suggests India's growth path is bright. For money managers in equities, it just reiterated their own views on India's trajectory and economic expansion, and they said the Nifty 50's hard-fought 13% recovery from its April lows has a firmer base.

 

But traders remain on tenterhooks, awaiting the result of Friday's meeting between US President Donald Trump and Russian President Vladimir Putin, hoping for a thaw in tensions that eventually leads to lower tariffs on India. Should the meeting go awry, the rupee and stock markets may quickly see a downturn. Analysts and traders fear the rating upgrade will do little to protect the domestic unit from hitting a fresh record low of 88 a dollar. In equities, the market is seen more resilient as traders – like S&P – keep their eyes affixed to the medium-term growth path.

 

"I don't expect too much appreciation in the rupee (after the S&P upgrade). I see short-term consolidation or appreciation before heading towards 88," Dilip Parmar, currency analyst at HDFC Securities, said. "Demand-supply is still in imbalance in short term. Lower supply of dollar due to FII (foreign institutional investment) outflows, high trade deficit reading, trade worries and geopolitical uncertainty are still weighing on the rupee."

 

Even in the medium-term, investor flows into India will come in at times when the economy is doing well, and dealers said it would be difficult to separate tactical market calls from investors drawn by the higher rating. With other major rating agencies showing no signs of an upgrade on the sovereign rating anytime soon, a wholesale reassessment of India's "investability" seems unlikely in global boardrooms and among money managers.

 

MORE AHEAD?

The Indian government, which has for years criticised rating agencies' assessment of India, welcomed S&P's rating upgrade. Economic Affairs Secretary Anuradha Thakur said she expects other global rating agencies to upgrade India's rating. "We do expect that other rating agencies will also take note of the factors which have led to an upgrade by S&P and follow suit," Thakur said.

 

However, a further rating upgrade by S&P or similar moves by other agencies may be limited. The other two major rating agencies, Moody's Ratings and Fitch Ratings, currently have India at the lowest rung investment grades of 'Baa3' and 'BBB-', respectively, with stable outlooks. In the past, these two were ahead of S&P in raising India's rating to investment grade.

 

Rating agencies generally raise the rating outlook before upgrading the rating itself. Even if Moody's and Fitch are looking at a better rating for India, it might take up to two years, going by S&P's timeline.

 

The space for further fiscal consolidation by the Indian government, a key reason for the upgrade, is also limited. While the government has shifted to a fiscal strategy that targets debt reduction, in line with rating agencies' metrics, it may take years to show substantial gains.

 

Christian de Guzman, senior vice president at Moody's, last year told Informist that a rating upgrade for India hinges on its ability to cut back on its debt burden and more importantly, its interest payments as a percentage of revenues.

 

For the Centre and state governments combined, the interest payments to revenue ratio is around 25%, which means 25% of revenue is dedicated to debt servicing. This is "by far the weakest amongst all investment grade countries" and much higher than the sub-10% median of 'Baa' rated countries, de Guzman had said. Even in its upgrade note, S&P said India's weak fiscal settings have always been the most vulnerable part of its sovereign ratings profile.

 

Even if the central government manages to bring down debt and interest costs over the next few years, the same may be very difficult for states. The ratings agency expects all the consolidation until FY29 to come from the Centre, with states' deficits seen unchanged at 2.7% of GDP.

 

S&P said it may raise India's ratings if fiscal deficits narrow meaningfully such that the net change in general government debt falls below 6% of GDP structurally from the 7.2% projected for FY26. Emkay's Arora said this would be a "tough ask".

 

S&P's outlook on the Indian economy is also on the optimistic side. The rating agency expects GDP to grow 6.5% in FY26 and average 6.8% in the next three years. While the FY26 GDP growth projection is the same as Reserve Bank of India's forecast, other economists and rating agencies see it closer to 6.3% with risks of a sub-6% print because of US tariffs.

 

Even the expectation of 6.8% average growth in the next three years appears optimistic. Economists at ICICI Bank Thursday said they expect India's medium-term growth trajectory at around 6.5%. S&P also sees marginal impact of US tariffs on India's growth, an assessment much more positive than the over half a percentage point hit projected by economists.

 

S&P's decision to upgrade India's rating comes at a very strange time, in the face of trade uncertainty and slowing economic growth in India. The government will tell you it is also a few years late. But as they say, better late than never.  End

 

US$1 = INR 87.55

 

With inputs from Pratiksha and Anjana Therese Antony

Edited by Avishek Dutta

 

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