India’s credit score got upgraded after 18 years. What will it take to reach the next level?
A single-notch upgrade from S&P Global could lower borrowing costs, attract new investors, and signal a new chapter for the world's fastest-growing major economy. Mint explores how India’s ratings journey has been and what lies ahead.
It has taken 18 years for India to climb a single step on a global credit ladder. Last week, S&P Global Ratings upgraded India’s sovereign rating to BBB (stable) from BBB–, the bottom-most rung of “investment grade", where the country had been languishing since 2007. On the surface, a one-notch move may look modest, but in terms of sovereign ratings, it carries weight.
Credit ratings are essentially a report card for a nation’s ability and willingness to repay debt. They influence the borrowing costs for governments, the risk perception of investors, and the finance options of companies abroad.
Ratings are broadly classified into “investment grade" and “speculative" (non-investment) grades. The former signals a low chance of default on loans, giving comfort to global investors such as pension funds and bond index managers, while the latter severely limits access to capital.
The recent upgrade effectively broadens India's appeal, potentially opening doors to a wider pool of global institutional investors who look to invest in countries rated BBB- and above, that is, in the investment grade.
The last upgrade came in 2007, when smartphones were still a novelty and the global financial crisis had not yet struck. Since then, the economy has tripled in size in nominal terms: from ₹48.9 trillion in 2007-08 to ₹330.7 trillion in 2024-25. Foreign exchange reserves have more than doubled, while public finances have endured multiple stress tests. Yet, India’s ratings stagnated at the floor of investment grade. Moody’s raised India to Baa in 2017, and Fitch still holds at BBB–, making S&P’s move the first meaningful step-up in nearly two decades.
The long climb
India’s ratings journey has been a stop-start affair. The first downgrade came during the 1991 balance-of-payments crisis that forced a bailout from the International Monetary Fund. Liberalization in the 1990s lifted ratings within the speculative zone, while fiscal reforms in the 2000s raised India back into investment grade.
But reversals followed, with the Asian crisis, fiscal slippages, banking stress in the 2010s, and pandemic-era deficits all keeping agencies cautious. “India’s ratings path has been one of upgrades in bursts, followed by long periods of stasis or downgrades," SBI Research noted.
S&P’s upgrade rests on three pillars: resilient growth, monetary stability, and gradual fiscal repair. India’s real GDP growth averaged 8.8% between FY22 and FY24, the fastest in Asia-Pacific, and is projected to sustain 6.8% annually over the next three years.
Inflation, for long India’s weak spot, has become more anchored. Since the adoption of inflation targeting in 2015, retail inflation has averaged 5.5% over the past three years, holding steady even through global energy shocks, the rating agency noted.
Fiscal indicators remain weak, but the trend is improving. S&P projects the general government deficit to fall from 7.8% of GDP in FY25 to 6.6% by FY29, while debt is expected to dip below 80% of GDP. As the agency put it, “the upgrade reflects buoyant economic growth… together with the government’s commitment to fiscal consolidation".
The balancing act
The data cited by S&P offers both reassurance and caution. At $674 billion, India’s foreign exchange reserves now cover nearly eight months of imports, the current account deficit narrowed to 0.6% of GDP in FY25, and government capital expenditure has risen to 3.1% of GDP, improving infrastructure quality. However, vulnerabilities also linger.
Despite the declining fiscal deficit ratio, India’s general government debt, at over 82% of GDP, is one of the highest among emerging markets. Fiscal consolidation is slower than peers, with state deficits averaging 2.7% of GDP. Per-capita GDP, at $2,679, trails Mexico ($14,158) and Indonesia ($4,925), both of which are in the same ratings bracket. Emkay Global warns that the current account gap could again exceed 1% of GDP in FY26, amid weaker exports and foreign portfolio outflows.
S&P has set a high bar for further upgrades. It says India’s ratings can be upgraded further if the government can steadily bring down the debt. “We may raise the ratings if fiscal deficits narrow meaningfully such that the net change in general government debt falls below 6% of GDP on a structural basis," it said. Simply put, India needs to show that it can not just cut deficits temporarily but bring down the pace of debt accumulation in a lasting way.
Execution on fiscal repair, inflation anchoring, and managing external shocks including oil prices, US tariffs, volatile capital flows will decide the next steps. For now, the upgrade is recognition of progress, but the climb ahead remains steeper than the one just crossed.
“The downside to rating stems from a lack of political commitment to fiscal consolidation. Accordingly, continued reforms and a reduction in the public debt-to-GDP ratio could bring further upgrades," said SBI Research.
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