India’s sovereign credit rating upgraded to ‘BBB’ with stable outlook by Morningstar DBRS

New Delhi: Morningstar DBRS on Friday upgraded India’s sovereign credit rating to 'BBB' with a stable outlook, up from 'BBB (low)', citing structural reforms, infrastructure investments, and fiscal consolidation as key drivers. The global credit rating agency also raised India’s Short-Term Foreign and Local Currency Issuer Ratings to 'R-2 (high)' from 'R-2 (middle)', maintaining a stable outlook.

The upgrade reflects India’s efforts to balance persistent fiscal challenges against strong growth prospects underpinned by robust investments in infrastructure and digitalisation, Morningstar DBRS said in a report.

"From a cyclical perspective, the country’s macroeconomic balances look healthy. Inflation has returned to the Reserve Bank of India’s (RBI) tolerance band of 4% (±2%). The external sector is strong, and a sound policy framework has helped the economy navigate challenging global conditions," Morningstar DBRS said in the report.

Read this | India's FY26 growth outlook remains resilient, but global trade risks loom, say rating agencies

A 'BBB' rating denotes adequate credit quality, suggesting a capacity to meet financial obligations despite potential vulnerabilities to economic shocks, the agency said.

However, despite recent gains, the country’s debt burden and fiscal deficits remain significant risks to future rating upgrades.

"On a general government basis, the public debt-to-GDP ratio has moderated since the shock of the pandemic but remains high at 80.2% in FY25. On the other hand, structural factors of the economy, such as relatively high domestic savings and favourable demographics, continue to underpin the country’s high growth potential," it said.

India’s overall debt-to-GDP ratio exceeds 80%, encompassing both state and central government debt. The central government’s debt ratio stood at 57.5% in FY24, projected to decline to 56.1% by FY26, according to the finance ministry.

The Union Budget has set a target to reduce the Centre’s debt to 50% of GDP by FY31, with a 1% margin. The fiscal deficit path aims to lower the debt ratio from 57.1% in FY25 to the target by FY31, assuming no major economic shocks.

The Indian government has been actively engaging with global rating agencies to secure further upgrades, focusing on fiscal discipline and structural reforms.

“India’s well-regulated financial system, credible inflation-targeting regime, and flexible exchange rate enhance the economy’s resilience to shocks,” the report said, highlighting the macroeconomic framework as a key strength.

Nevertheless, Morningstar DBRS warned that external risks persist, particularly the impact of US tariffs.

Also read | When will global credit rating agencies get their assessments of India right?

“While the imposition of US tariffs adds uncertainty to the outlook, India is comparatively well-positioned, given the low level of goods exports to the US and the domestically driven nature of the economy,” it said.

As of May 2024, India’s sovereign credit ratings from major global agencies are: S&P: BBB− (Positive Outlook), Moody’s: Baa3 (Stable Outlook), and Fitch: BBB− (Stable Outlook).