Fitch affirms India at 'BBB-' with stable outlook; tariff impact on GDP will be 'modest'

Fitch Ratings Monday affirmed India's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB-' with a Stable Outlook, saying that the country's ratings are supported by its robust growth and solid external finances.

India's economic outlook remains strong relative to peers, even as momentum has moderated in the past two years, said the rating agency. "We forecast GDP growth of 6.5% in the fiscal year ending March 2026 (FY26), unchanged from FY25, and well above the 'BBB' median of 2.5%."

Fitch  said that domestic demand will remain solid, underpinned by the ongoing public capex drive and steady private consumption. However, private investment is likely to remain "moderate", particularly given heightened US tariff risks. The firm said that there has been a notable slowdown in nominal GDP growth, which it forecasts to expand 9.0% in FY26, from 9.8% in FY25 and 12.0% in FY24.

Tariff risks modest: The agency said, that the direct impact on GDP will be modest as exports to the US account for 2% of GDP, but tariff uncertainty will dampen business sentiment and investment. The Trump administration is planning to impose a 50% headline tariff on India by 27 August, although Fitch believes this will eventually be negotiated lower.

Moreover, India's ability to benefit from supply chain shifts out of China would be reduced if US tariffs ultimately remain above that of Asian peers, it said. "Proposed goods and services tax (GST) reforms, if adopted, would support consumption, offsetting some of these growth risks."

Medium-term outlook: Fitch estimates potential GDP growth of 6.4%, led by strong public capex, a private investment pick-up and favourable demographics. "We assume healthy corporate and bank balance sheets will spur an investment acceleration, but this may depend on better visibility over the domestic consumption outlook”

Fiscal Credibility Improving: The agency said, strong revenue growth and reductions in subsidy spending drove consolidation even as capex spending rose steadily to 3.2% of GDP in FY24 from around 1.5% in FY19, which should help reduce infrastructure gaps and boost potential growth.

In recent years, the central government (CG) has bolstered fiscal transparency, enhanced spending quality, and demonstrated commitment to a path of steady, though gradual, fiscal consolidation by achieving or outperforming budget targets. The CG deficit fell to 4.8% of GDP in FY25 from 5.5% in FY24 and a peak of 9.2% in FY21.

Modest Deficit Reduction Forecast: Fitch has forecast the CG deficit to decline to 4.4% of GDP in FY26, meeting the FY22 budget objective of reaching a 4.5% deficit in FY26. Revenue may underperform as nominal GDP growth slows, but we think spending will be managed to reach the target, it said.

Structural Fiscal Weaknesses: India’s GG debt burden is elevated at a Fitch-estimated 80.9% of GDP in FY25, well above the 59.6% 'BBB' median. "We forecast a slight rise in debt to 81.5% in FY26, as nominal growth slips. We expect debt to follow only a modest downward trend to 78.5% by FY30, even as nominal growth recovers to 10.5%. If nominal growth persists at below 10%, debt reduction could become challenging. Medium-term fiscal policy will now be anchored by the CG's new objective of reducing CG debt to 50% (+/-1%) by FY31, from 56.1% in FY26, per budget estimates."

Strong External Finances: India’s external finances remain a rating strength, underpinned by high FX reserves, a net external creditor position, and a low current account deficit (CAD).

Fitch forecasts a stable CAD at 0.7% of GDP in FY26 before rising gradually to a still modest 1.5% by FY28. FX reserves rose by USD59 billion to USD695 billion by 15 August 2025 from end-December 2024, around eight months of current external payment coverage.