Image Source : FILE India’s economy grew 7.2 per cent in 2022-23 and 8.7 per cent in 2021-22, respectively.

S&P Global Ratings has upgraded India’s sovereign rating outlook to ‘positive’ from ‘stable’, while maintaining the rating at ‘BBB-‘. Notably, the ‘BBB’ ratings indicate that expectations of default risk are currently low. The agency cited India’s robust economic expansion as a key factor positively influencing its credit metrics. This development coincides with the final stages of India’s extensive Lok Sabha elections, which have spanned six weeks, making it the largest democratic exercise in the world.

Nirmala Sitharam calls it ‘welcome development’

The counting of votes is scheduled for June 4, and there is widespread anticipation among investors that Prime Minister Narendra Modi will secure a third term in office. Finance Minister Nirmala Sitharaman welcomed the upgrade, describing it as a “welcome development” and a testament to the country’s strong economic performance. “We expect sound economic fundamentals to underpin the growth momentum over the next two to three years,” S&P said, adding that regardless of the election outcome, it expected broad continuity in economic reforms and fiscal policies.

S&P upgrades India’s Credit Outlook

This optimistic adjustment in India’s credit outlook by S&P underscores the international confidence in India’s economic resilience and growth potential. The change comes at a pivotal moment as the nation awaits the election results, which could solidify continued economic policies under Modi’s administration. The finance minister’s positive reception of the rating upgrade reflects the government’s commitment to maintaining economic stability and growth, factors that are crucial for sustaining investor confidence and further economic development.

The rating agency’s positive outlook on India is predicated on its robust economic growth, pronounced improvement in the quality of government spending, and political commitment to fiscal consolidation, it said. “We believe these factors are coalescing to benefit credit metrics,” S&P analysts wrote in a note. The Indian rupee was off its day’s lows while the benchmark 10-year bond yield eased three basis points to 6.99% after the outlook upgrade.

India’s fiscal path shows gradual improvement

India’s weak fiscal settings had always been the most vulnerable part of its sovereign ratings profile, S&P said. Elevated fiscal deficits, a large debt stock and interest burden persist, but the government is prioritising ongoing consolidation efforts, it added. “With economic recovery now well on track, the government is again able to depict a more concrete (albeit gradual) path to fiscal consolidation. Our projections indicate general government deficit of 7.9% of GDP in fiscal 2025 to slowly decline to 6.8% by fiscal 2028,” the S&P analysts said.

India’s GDP growth to aid debt reduction

S&P expects India’s economy to expand at close to 7% annually over the next three years which it said should have a moderating effect on the ratio of government debt to GDP despite high fiscal deficits. Its favourable GDP growth to interest rate differential is keeping government borrowing sustainable, S&P said, adding that it expects the country’s debt to GDP ratio to reduce to 81% by fiscal 2028 from 85% currently. Sustained deceleration in price growth has allowed the central bank to conclude its monetary tightening campaign and S&P expects a moderately easier monetary policy stance before the end of fiscal 2025, it said. 

The agency may raise its ratings on India if fiscal deficits narrow meaningfully to bring down the general government debt to below 7% of GDP on a structural basis or if it observes a sustained and substantial improvement in the central bank’s monetary policy effectiveness and credibility with inflation staying low on a durable basis, it said.

(With inputs from Reuters)

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