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Informist, Monday, Sept. 29, 2025

 

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--Moody's: See India committed to goal of gradual debt reduction over 10 yrs 
--Moody's: Expect domestic mkt-oriented foreign investment to remain robust 
--Moody's: See India-US negotiations resulting in less punitive tariff rates 
--Moody's: US tariffs to cap India potential growth over medium-to-long term 
--Moody's: US tariffs to have limited near-term negative effect on India GDP 
--Moody's: See India GDP growth 6.5% in FY26 on easing of monetary policy 
--Moody's:See India GDP growth 6.5% in FY26 on continued govt capex, low CPI 
--Moody's: India domestic demand formidable buffer to external uncertainties 
--Moody's: Fisc measures to boost pvt consumption erode India govt revenues 
--Moody's: India fisc consolidation not enough to improve debt affordability 
--Moody's: India GDP growth not enough to improve weak debt affordability 
--Moody's:India credit strength balanced by fisc weakness, which will remain 
--Moody's: US tariffs hinder India's capacity to attract mfg invest 
--Moody's:India rtg shows sustained domestic financing for ongoing fisc gaps 
--Moody's: India rtg shows current credit strength, sound external position 
--Moody's affirms India's 'Baa3' rating, maintains Stable outlook

 

NEW DELHI – Moody's Ratings on Monday affirmed India's long-term local and foreign-currency issuer ratings and the local-currency senior unsecured rating at 'Baa3'. The agency also maintained its stable outlook for the economy. "The rating affirmation and stable outlook reflect our view that India's prevailing credit strengths, including its large, fast-growing economy, sound external position and stable domestic financing base for ongoing fiscal deficits will be sustained," the rating agency said. However, it added that India's credit strength is balanced by long-standing weaknesses on the fiscal side which will remain.

 

The rating agency flagged India's strong growth potential, underpinned by a large domestic market and favourable demographics that also insulates the economy from external shocks, as the rationale behind the rating affirmation. The agency has projected India's GDP to grow 6.5% in the current financial year. 

 

"The stable outlook incorporates India's gradually improving fiscal metrics and resilient growth prospects compared with peers," the agency said. Moody's said it will upgrade India's credit profile if the government undertakes fiscal measures to durably raise revenue, narrow the fiscal deficit, and contribute to a more marked decline in debt, so there is an improvement in the affordability of India's high debt burden to levels more consistent with higher-rated peers.  

 

FISCAL METRICS

India's weak fiscal metrics and debt affordability has time and again been flagged as a key hindrance to a rating upgrade. Moody's said India's strong GDP growth and gradual fiscal consolidation will lead to only a very gradual decline in government's high debt burden, and will not be sufficient to materially improve weak debt affordability, especially as the recent fiscal measures to boost private consumption erode the government's revenues. 

 

Prime Minister Narendra Modi's government has given dual tax bonanzas in the form of income tax cut announced in the Budget for 2025-26 (Apr-Mar) and the recent sweeping goods and services tax reforms, which will lead to savings of over INR 2.5 trillion annually. Both these consumption-boosting measures have been announced when the government, after a couple of years of high tax buoyancy, has found itself in a soup in FY26 with collections lagging Budget estimates so far. Taxes have grown only 0.8% in the first four months of the current fiscal to INR 10.93 trillion. 

 

"...while the government has demonstrated a lengthening track record of fiscal consolidation, recent policy measures have signaled a shift towards greater support for the economy amid a weaker global macroeconomic environment," the rating agency said. "These developments have narrowed the tax base and will result in foregone revenue, thus curtailing potential improvements in debt affordability," it added. 

 

The agency also reiterated that "relative to general government revenue, India's general government interest payments will remain large as compared to our universe of investment-grade sovereigns." For context, according to the Budget for FY26, the Indian government will spend 20 paise of every rupee it earns to pay interest on its past borrowings when it will spend 4 paise of every rupee earned on pensions and 6 paise on major subsidies.  

 

Nevertheless, Moody's expects the government to remain committed to their goal of gradual debt reduction over the next decade, which implies limited risks of significant reversals to gains in fiscal consolidation since India emerged from the pandemic. The Centre has announced its intent to shift its fiscal consolidation benchmarking to metrics favoured by rating agencies, such as the debt-to-GDP ratio and monitoring interest expenses. The Budget documents for FY26 said the government aims to keep the fiscal deficit each year such that the central government debt will be on a declining path as a percentage of GDP. Its target for fiscal consolidation is that the Centre's debt is 50% of GDP, plus or minus 1%, by FY31 from 56.1% in FY26.

 

GROWTH STORY

On growth, the rating agency said India will remain the fastest growing G-20 economy through at least the next two to three years. At 6.5%, Moody's growth forecast for FY26 is in line with the Reserve Bank of India's projection. In the first quarter of FY26, India's GDP grew at a five-quarter high of 7.8%. Many economists have raised their growth forecast after the faster-than-expected GDP growth in the June quarter. "We project economic growth to be sustained at 6.5% in 2025-26 as the government's continued emphasis on capital expenditure, lower inflation and the consequent easing of monetary policy will support robust domestic consumption and investment," it said. 

 

Although the US' tariffs pose a shadow on India's growth outlook, Moody's said the negative impact will be limited in the near term. However, it may constrain potential growth over the medium to long term by hindering India's ambitions to develop a higher value-added export manufacturing sector, it added. "At this stage, we expect subsequent negotiations to result in less punitive rates and domestic market-oriented foreign investment to remain robust."

 

The Indian economy, particularly exports and capital formation, faces risks from the imposition of tariffs by the US. Citing displeasure over the high trade gap, the US has imposed 25% reciprocal tariffs on India, with an additional 25% as punitive tariff for trading with Russia. US' higher tariffs on India result in a pricing disadvantage of 30–35% for Indian exports, making them less competitive compared to those from China, Vietnam, Cambodia, the Philippines, and other Southeast and South Asian countries. The US accounts for nearly 20% of India's total exports. 

 

India's domestic demand remains a formidable buffer to the external uncertainties, it added.

 

RATING FUTURE

Moody's outlined both upside and downside scenarios to further rating changes. The agency said that a case for a negative rating action or downgrading India's rating could be made if there is a reversal in improvement in fiscal consolidation and lead to materially higher debt and a significant worsening in debt affordability. In addition, a resurgence of financial sector stress – that is unlikely to be addressed promptly and effectively – would also put downward pressure on the rating. 

 

On the other hand, India may be in line for a positive rating action or an upgrade if there was improvement in the affordability of India's high debt burden which would entail fiscal measures that durably raise revenue, narrow the fiscal deficit and contribute to a more marked decline in debt.

 

According to the agency, effective implementation of structural reforms that leads to a significant pick-up in private sector investment, faster growth in GDP per capita and broader economic diversification would support stronger assessments of policy effectiveness and the credit profile.  End

 

Reported by Priyasmita Dutta and Krity Ambey

Edited by Vandana Hingorani

 

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