The S&P Upgrades India’s Sovereign Credit
Asia News Agency
Global rating agency S&P upgraded India’s sovereign credit rating to 'BBB' with a stable outlook, citing robust economic growth, political commitment for fiscal consolidation and 'conducive' monetary policy to check inflation.
Reflects a combination of key factors: As per S&P's India sovereign rating review, the upgrade reflects a combination of key factors, including India's buoyant and dynamic economic growth, the government's sustained commitment to fiscal consolidation, improved quality of public spending, particularly on capex and infrastructure, and strong corporate, financial, and external balance sheets.
S&P in its report details the key strengths of the Indian economy, which have enabled India to stand out as one of the fastest-growing major economies globally, with real GDP growth averaging 8.8 per cent from FY22 to FY24, the highest in the Asia-Pacific region.
Monetary policy reforms, particularly the adoption of an inflation-targeting regime, have anchored inflation expectations more effectively, the ministry said citing the rating agency.
S&P has also recognised that despite global headwinds and price shocks, India has demonstrated resilience by maintaining overall price stability.
Monetary improvements, combined with the ongoing development of deep domestic capital markets, have created a more stable and supportive environment for the overall economic scenario.
The report further observes that India's external and financial positions remain strong and the democratic institutions continue to ensure policy continuity and long-term economic stability.
Positive outlook for FY26: Looking ahead, it said, S&P projects GDP growth of 6.5 per cent in FY26 and a continued momentum over the next three years.
Limited impact of US tariffs: The report also noted that the impact of recently imposed US tariffs is expected to be limited, owing to India's large and resilient domestic consumption base, the ministry said.
Reaction of Finance Ministry
The sovereign rating upgrade by S&P Thursday is a significant affirmation of India's economic trajectory and prudent fiscal management, the finance ministry said.
This marks the country's first sovereign upgrade by S&P in 18 years, the previous one being in 2007 when India was elevated to investment grade at BBB-. In May 2024, the agency revised its outlook on India from 'Stable' to 'Positive', the finance ministry said.
Credible inflation management and increasing policy predictability have also played a central role, the ministry said.
Foreign capital inflows set to rise, borrowing costs to ease
Foreign capital inflows into India are likely to accelerate following S&P's recent credit rating upgrade, which is also expected to lower borrowing costs for the country, said Sonal Badhan, Economist at Bank of Baroda (BoB).
"In both the short and long term, foreign capital inflows can be expected to be impacted positively, as the upgrade reaffirms trust in India's 'sound fundamentals' and 'growth momentum'. We are likely to see higher FPI inflows this year and a decline in bond yields," BoB Economist said.
RBI data on FDI: The RBI's Annual Financial Account data for Q2 of FY 2024-25 (July-September 2024) indicates that the Net foreign direct investment recorded an outflow of USD 2.2 billion, compared to an outflow of USD 0.8 billion during the same quarter in FY 2023-24.
India recorded provisional FDI inflows of USD 81.04 billion in FY 2024-25, marking a 14 per cent increase from USD 71.28 billion in FY 2023-24, according to the government data.
Badhan further added that the upgrade is also likely to encourage other rating agencies, such as Moody's and Fitch, to follow suit.
May make borrowing overseas cheaper
The upgrade is expected to make overseas borrowing cheaper for local companies and non-bank lenders, leading to savings of up to 20 basis points for top-rated firms, industry executives said. One basis point is a hundredth of a percentage point.
Industry executives said the current ECB (external commercial borrowings) borrowings is upwards of 7.2-7.5% on a full-hedged basis for top-rated companies, lower compared to domestic bank loans. One-year marginal cost of borrowing-based lending rate, which is the benchmark for loans to corporate and NBFCs, is upwards of 8.50%.
"With Thursday's upgrade by S&P, non-banking finance industry anchor ratings could shift up and hence companies will also benefit as the global investor base expands for papers from NBFI issuers. With the better rating there may be a spread benefit of 15 to 40 basis points for companies belonging to the non-banking finance industry," said Govind Modani, head of treasury, IIFL Finance.
In FY25, ECB registrations hit a record $61 billion, with NBFCs' share rising to 43%-up from a 20-37% average over the past five years, RBI data shows. ECBs have become a cheaper funding source for NBFCs, helping reduce borrowing costs and diversify their funding mix.
