Moody's retains India's credit rating at ‘Baa3’ with stable outlook, expects growth to outpace G20 economies

Moody's Ratings has retained India's credit rating at 'Baa3' and maintained a stable outlook owing to its large and fast-growing economy, sound external position, and stable domestic financing base.

In a note on Monday, the rating agency said these strengths provide resilience amid the impact of high US tariffs and other geopolitical tensions.

India's credit strengths are balanced by long-standing weaknesses on the fiscal side, which will remain, it said, while adding that strong gross domestic product (GDP) growth and gradual fiscal consolidation will lead to an only very gradual decline in the government's high debt burden, and will not be sufficient to materially improve weak debt affordability, especially as recent fiscal measures to reinforce private consumption erode the government's revenue base.

"The rating affirmation and stable outlook reflect our view that India's prevailing credit strengths, including its large, fast-growing economy, sound external position, and stable domestic financing base for ongoing fiscal deficits, will be sustained. These strengths lend resilience to adverse external trends, in particular as high US (Aa1 stable) tariffs and other international policy measures hinder India's capacity to attract manufacturing investment," the note said.

Earlier this month, Japan’s Rating and Investment Information Inc. (R&I) raised India's long-term rating to BBB+ from BBB, with a ‘stable’ outlook.

S&P Global Morningstar DBRS also upgraded the ratings earlier in August and May.

These ratings gains are significant as they come amid global uncertainty and geopolitical volatility. The monthly economic review of the Union finance ministry released earlier this month also noted that steady growth, macroeconomic stability, and credible fiscal discipline over the past few years have earned India its third sovereign ratings upgrade in FY25.

Reforms initiated by the Union government are expected to enhance the economy’s resilience against external trade-related shocks, the ministry said in its report.

India's growth to outpace G20 economies

According to Moody's, India's credit profile benefits from its strong growth potential, underpinned by a large domestic market and favourable demographics that have historically supported resilient, demand-driven expansion, helping insulate the economy from external shocks.

“Even as real GDP growth moderated in the fiscal year ended March 2025 (FY25) to 6.5% from 9.2% in FY24, India has been and will remain the fastest growing G20 economy through at least the next two to three years,” it said.

The rating agency has projected economic growth to sustain at 6.5% in 2025-26 as the government's continued emphasis on capital expenditure, lower inflation, and the consequent easing of monetary policy will support robust domestic consumption and investment.

It also noted that the imposition of high tariffs by the US will have limited negative effects on India's economic growth in the near term. However, it may constrain potential growth over the medium to long term by hindering India's ambitions to develop a higher value-added export manufacturing sector.

The US has imposed a 50% tariff on India compared to 15-20% tariff rates applied to other Asia Pacific countries.

“At this stage, we expect subsequent negotiations to result in less punitive rates and domestic market-oriented foreign investment to remain robust,” it added.

“We do not expect other US policy shifts, including those related to new applications for skilled worker visas and potential levies on US businesses that outsource operations offshore, to significantly weigh on workers' remittances or India's services exports,” it said, while adding that risks of a significant widening of India's current account deficit will remain limited.

Moody's noted that the stable outlook incorporates India's gradually improving fiscal metrics and resilient growth prospects compared with peers. However, fiscal accommodation in the context of the uncertain global macroeconomic outlook, including revenue-eroding measures, could impede progress towards debt reduction and exacerbate already weak debt affordability, it said.