In a significant boost for India’s financial standing, Morningstar DBRS has upgraded the country’s sovereign credit rating to ‘BBB’ with a stable outlook, shifting from the previous ‘BBB (low)’ status. This upgrade is attributed to India’s commitment to structural reforms, increased infrastructure investments, and ongoing fiscal consolidation efforts. Additionally, the agency has elevated India’s Short-Term Foreign and Local Currency Issuer Ratings to ‘R-2 (high)’, reflecting a positive shift in the country’s economic fundamentals.

Key Drivers of the Upgrade

According to the report, India’s economic landscape showcases a promising balance between persistent fiscal challenges and strong growth prospects, primarily fueled by substantial investments in infrastructure and digitalization.

• Macroeconomic Stability: The report indicates that the country’s macroeconomic balances are robust, with inflation rates aligning with the Reserve Bank of India’s (RBI) target of 4% (±2%).
• Resilient External Sector: India’s external sector is described as strong, backed by sound policies that have helped the economy withstand global challenges.

Understanding the ‘BBB’ Rating

A ‘BBB’ rating signifies adequate credit quality, which implies that India can meet its financial obligations, though it may face vulnerabilities in times of economic stress. Despite the recent upgrade, the agency notes significant risks surrounding the nation’s debt levels and fiscal deficits.

• The public debt-to-GDP ratio remains elevated at 80.2% for FY25, although it has moderated since the pandemic’s impact.
• The central government’s debt is projected to decrease from 57.5% in FY24 to 56.1% by FY26, as outlined by the finance ministry.

Future Fiscal Goals

The Indian government has set ambitious targets to reduce its debt to 50% of GDP by FY31, with a strategy to lower the fiscal deficit from 57.1% in FY25. This plan is contingent upon maintaining economic stability without significant shocks.

Government Engagement with Rating Agencies

In its pursuit of better ratings, the Indian government is actively collaborating with global rating agencies, emphasizing fiscal discipline and structural reforms. Morningstar DBRS praised India’s well-regulated financial system, along with its credible inflation-targeting approach and adaptable exchange rate, as key strengths that bolster the economy’s resilience to external shocks.

External Risks and Economic Outlook

Despite the positive outlook, Morningstar DBRS cautions that external risks persist, particularly regarding potential US tariffs. However, the agency believes that India is relatively well-positioned due to its low goods export levels to the US and a strong domestic market.

As of May 2024, India’s ratings from major global agencies include S&P at BBB− (Positive Outlook), Moody’s at Baa3 (Stable Outlook), and Fitch at BBB− (Stable Outlook). The outlook remains optimistic as India continues to navigate its economic landscape with resilience and strategic foresight.