India keeps investment-grade rating on strong growth, but high debt blocks an upgrade: Fitch

Fitch Ratings has kept India’s long-term sovereign credit rating unchanged at ‘BBB-’, the lowest investment-grade rating, with a Stable Outlook. The ratings agency said India’s strong economic growth and healthy external finances remain key strengths, while high government debt and deficits continue to hold back the rating.Fitch expects India’s economy to remain resilient despite near-term pressure from higher energy prices. It said India’s improving record of maintaining economic stability and greater policy credibility should help support growth over the coming years.Strong economic growth could also gradually improve India’s finances by helping bring down government debt relative to the size of the economy.However, India continues to have much higher government debt, deficits and interest costs than other countries with similar credit ratings. Lower GDP per capita and weaker scores on some governance indicators also weigh on the rating.India to grow much faster than similarly rated economiesFitch expects India’s economy to grow 6.4% in FY27. While that would be slower than the average growth of 7.4% over the past three years, it would still be more than three times the 2% median growth expected among countries with ‘BBB’ ratings.The agency said the Indian economy has handled a series of shocks relatively well in recent years and expects that resilience to continue.The US-Iran conflict remains a risk because India imports a large part of its energy needs. However, Fitch does not expect the resulting energy shock to have a lasting impact on India’s longer-term growth prospects.Fitch estimates that India can sustain potential growth of around 6.4%, supported by government spending on infrastructure, a recovery in private investment and favourable demographics. Healthy balance sheets at banks and companies should also help businesses invest more over time.GST and labour reforms, along with the government’s efforts to reduce regulations, could provide an additional boost. Fitch also pointed to India’s efforts to open up trade through bilateral agreements and lower trade barriers.Inflation expected to remain under controlFitch expects inflation to rise following the increase in energy prices but remain within the Reserve Bank of India’s 2%-6% target range.It expects inflation to average 4.1% in FY27, compared with 2.1% in FY26, while core inflation is expected to remain around 4%.Fitch said inflation remains broadly under control, with government measures limiting how much higher energy costs are passed on to consumers.However, it expects the RBI to raise the repo rate by 25 basis points to 5.5% later this year to prevent higher energy prices from feeding into broader inflation and to address risks from El Nino.Government deficit expected to fall slowlyFitch expects the combined deficit of the central and state governments to decline to 7.3% of GDP in FY27 from 7.5% in FY26.It expects the Centre to broadly meet its fiscal deficit target of 4.3% of GDP despite higher fertiliser subsidies and cuts in excise duties, although there is some risk of a small miss. State government deficits are expected to decline to around 3% of GDP.Fitch said the government has shown a commitment to gradually reducing its deficit while continuing to spend on infrastructure.High government debt remains India’s biggest weaknessIndia’s high government debt continues to be one of the main reasons preventing a higher credit rating.Combined central and state government debt stood at an estimated 84.4% of GDP in FY26, compared with a median of just 57% for countries with similar ‘BBB’ ratings.Fitch expects India’s debt burden to decline gradually to around 79% of GDP by FY31.Interest payments also consume a much larger share of government revenue in India than in similarly rated countries. India’s interest payments amount to 23.7% of government revenue, compared with the ‘BBB’ median of 8.4%.These weaknesses are partly offset by the fact that most Indian government debt is held domestically and is denominated in rupees. Foreign-currency debt accounts for just 2.5% of the total, compared with a 30% median among ‘BBB’ countries, reducing India’s exposure to currency swings and foreign investors.India’s external finances remain a strengthFitch said India’s financial position relative to the rest of the world remains healthy, supported by large foreign exchange reserves and a relatively small current account deficit.It expects the current account deficit to widen to 1.4% of GDP in FY27 from 0.6% in FY26, largely because of higher energy costs.India’s foreign exchange reserves are expected to reach $733 billion by the end of FY27, enough to cover about 7.4 months of external payments.Capital flowed out of India during the first quarter amid weaker foreign direct investment and portfolio flows, but Fitch said those outflows have since reversed following measures taken by the RBI and the government.What could lead to a rating upgrade?For India to earn a higher credit rating, Fitch would need to see greater confidence that strong economic growth can be sustained over the medium term, particularly through a lasting recovery in private investment.A steady reduction in government debt and the share of revenue spent on interest payments could also support an upgrade.On the other hand, a failure to bring down government deficits or an economic shock that pushes debt substantially higher could put downward pressure on India’s rating. A sustained weakening of India’s growth prospects could also hurt the rating.

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