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S&P upgrades outlook on India’s sovereign rating to ‘positive’

May 31, 2024

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S&P Global Ratings raised India’s sovereign rating outlook to ‘positive’ from ‘stable’ while retaining the rating at ‘BBB-’, saying that the country’s robust economic expansion was having a constructive impact on its credit metrics and growth momentum over the next two to three years.

India’s marathon national election lasting six weeks to be counted on June 4 and investors are gearing up for Prime Minister Narendra Modi securing a third term in office. The rating agency’s positive outlook on India is predicated on its robust economic growth, pronounced improvement in the quality of Government spending.

The Indian rupee was off its day’s lows while the benchmark 10-year bond yield eased three basis points to 6.99% after the outlook upgrade. India’s weak fiscal settings had always been the most vulnerable part of its sovereign ratings profile.

Elevated fiscal deficits, a large debt stock and interest burden persist, but the Government is prioritizing ongoing consolidation efforts. With economic recovery now well on track, the Government is again able to depict a more concrete path to fiscal consolidation. The projections indicate general Government deficit of 7.9% of GDP in fiscal 2025 to slowly decline to 6.8% by fiscal 2028.

S&P expects India’s economy to expand at close to 7% annually over the next three years which should have a moderating effect on the ratio of Government debt to GDP despite high fiscal deficits. Its favorable GDP growth to interest rate differential is keeping Government borrowing sustainable, adding that it expects the country’s debt to GDP ratio to reduce to 81% by fiscal 2028 from 85% currently.

Sustained deceleration in price growth has allowed the central bank to conclude its monetary tightening campaign and S&P expects a moderately easier monetary policy stance before the end of fiscal 2025.

The agency may raise its ratings on India if fiscal deficits narrow meaningfully to bring down the general Government debt to below 7% of GDP on a structural basis or if it observes a sustained and substantial improvement in the central bank’s monetary policy effectiveness and credibility with inflation staying low on a durable basis.

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