S&P Global Ratings raised India’s sovereign credit rating in mid-August from BBB- to BBB, one notch above its lowest investment-grade rating.
The rating agency had moved India’s rating to a positive outlook in March, but the upgrade itself came after a gap of 18 years.
S&P cited the Indian government’s sound fiscal management, strong GDP growth, higher quality government spending, and the effectiveness of its monetary policy in managing inflationary expectations. According to the agency, India’s real GDP growth between 2022 and 2024 was 8.8%, the best in Asia-Pacific. S&P expects a GDP growth rate of 6.8% for the next three years, keeping India among the world’s best performing economies in the world.
The ratings rationale considered the government’s sustained and ongoing effort at debt reduction, structural improvement in the fiscal deficit, and reduced cost of debt. India’s debt-to-GDP ratio—consolidated central plus state government debt—has steadily climbed down to 83% of GDP from 90% several years ago; S&P’s projection is for 78% of GDP by 2028-29. Tax-to-GDP ratio has improved to 11.6% and is structurally expected to keep rising over the next several years. The combined fiscal deficit—center plus states—has dropped to 7.8% of GDP; S&P expects it to come down to 7.3% next year and drop to 6.6% by 2028-29.
A key difference has been the shift in government expenditure to an increased focus on rapid infrastructure creation. India’s total public capital spending now equals 5.5% of GDP, which is higher than its sovereign peers. Sustained infrastructure investment has removed economic bottlenecks, which in turn should sustain higher levels of economic activity and growth rates. BofA Securities says S&P’s rating upgrade validates the government’s fiscal credibility and raises the possibility that other rating agencies will follow suit.
The Indian government’s 10-year bond yield dropped by 10 basis points immediately following news of the upgrade, as the expectation is now for an increased weight for India in global bond indices and increased flow of funds into the Indian bond market.
