S&P raises India's credit rating to BBB in first upgrade for 18 years

Ratings agency says effects of US tariffs on Indian economy 'will be manageable'

Mumbai, India. S&P Global Ratings says the country has benefited from a commitment to fiscal consolidation and efforts to improve spending quality. Photo: Alamy

S&P Global Ratings upgraded India's long-term sovereign crediting rating to "BBB" from "BBB-" on Thursday, owing to the country's fiscal consolidation, credible monetary policy and strong economic growth.

It was India's first upgrade in 18 years.

“The upgrade of India reflects its buoyant economic growth, against the backdrop of an enhanced monetary policy environment that anchors inflationary expectations,” S&P Global analysts wrote. "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."

S&P also raised India's short-term ratings to "A-2" from "A-3", adding that the outlook on the long-term rating is stable. It also revised its transfer and convertibility assessment to "A-" from "BBB+".

India's Ministry of Finance said it welcomed S&P's decision to upgrade the country's credit rating.

The ratings agency said India's economy had a “remarkable comeback” from the Covid-19 pandemic, with real GDP growth averaging 8.8 per cent over the 2022 fiscal year to the 2024 fiscal year, the highest in the Asia-Pacific. Analysts said they expect GDP to increase 6.8 per cent annually over the next three years. “India remains among the best performing economies in the world,” S&P Global said.

S&P Global also expects the effects of the US tariffs on India's economy “will be manageable”, noting that about 60 per cent of its growth comes from domestic consumption. US President Donald Trump last week doubled India's tariff rate to 50 per cent because of its continued imports of Russian energy.

“We expect that in the event India has to switch from importing Russian crude oil, the fiscal cost, if fully borne by the government, will be modest given the narrow price differential between Russian crude and current international benchmarks,” analysts wrote.

Analysts also anticipated that, factoring in sectoral exemptions on pharmaceuticals and consumer electronics, the exposure of Indian exports that would be subjected to tariffs at 1.2 per cent of GDP. While this could lead to a one-off hit to growth, S&P does not anticipate it will hurt India's long-term growth prospects.

S&P also projected a general government deficit of 7.3 per cent of GDP in the 2026 fiscal year to fall to 6.6 per cent by to the 2029 fiscal year. It also anticipates the country's debt-to-GDP ratio to fall to 78 per cent by the 2029 fiscal year.

S&P said it may lower the ratings if it finds weak political commitment to consolidated public finances. It may raise the ratings if fiscal deficits narrow in a way that would lower the general government debt below 6 per cent of GDP on a structural basis.