S&P revises India's outlook to 'positive', maintains 'BBB-' rating

S&P rating aligns with similar ratings from other global agencies, including Fitch and Moody's, which also assigned the lowest investment grade rating to India but with a stable outlook

Rating agency Standard & Poor (S&P) on Wednesday announced a revision in the outlook for the Indian economy from ‘stable’ to ‘positive’, while affirming the overall rating at ‘BBB-’, which represents the lowest investment grade rating. The transfer and convertibility assessment remains 'BBB+'.

The positive outlook reflects expectations of sustained policy stability, deepening economic reforms, and high infrastructure investment, which are anticipated to support long-term growth prospects.

Coupled with cautious fiscal and monetary policies, these factors could diminish the government's elevated debt and interest burden, bolstering economic resilience and potentially leading to a higher rating within the next 24 months, S&P said.

Last year in May, S&P Global Ratings upheld India’s sovereign rating at ‘BBB-’ for the long term and ‘A-3’ for the short term, maintaining a stable outlook. At that time, the rating agency highlighted sound economic fundamentals expected to support growth over the following two to three years, despite concerns over weak fiscal performance and low gross domestic product (GDP) per capita.

Today’s announcement by S&P aligns with similar ratings from other global agencies, including Fitch and Moody’s, which also assigned the lowest investment grade rating to India with a stable outlook.

“We expect sound economic fundamentals to underpin the growth momentum over the next two to three years,” the ratings firm said in a statement.

India's rating outlook

"We may raise the ratings if India's fiscal deficits narrow meaningfully such that the net change in general government debt falls below 7 per cent of GDP on a structural basis," the agency said.

It added that sustained public investment in infrastructure, combined with fiscal adjustments, could improve India's weak public finances. Additionally, a notable improvement in the central bank's monetary policy effectiveness and credibility, resulting in lower inflation rates, could also prompt a ratings upgrade.

Additionally, the agency expressed expectations of continued economic reforms and fiscal policies, regardless of the outcome of upcoming elections.

S&P also warned that India's outlook may be revised to 'stable'  if there was a decline in political commitment to maintaining sustainable public finances, indicating a weakening of the country's institutional capacity.

"If current account deficits widen materially to weaken India's external position such that the country becomes a narrow net external debtor, we could also revise the outlook to stable," it said.

Rationale behind India's outlook and rating

The positive outlook is based on India's robust economic growth, improved quality of government spending, and a political commitment to fiscal consolidation.

"The Indian economy has staged a remarkable comeback from the Covid-19 pandemic. We estimate real GDP growth in the past three years to have averaged 8.1 per cent annually, the highest in the Asia-Pacific region. We expect these growth dynamics to continue to play out in the medium term, with GDP expanding close to 7 per cent annually over the next three years. This has a moderating effect on the ratio of government debt to GDP despite still-wide fiscal deficits," S&P said.

Irrespective of the 2024 general election results, S&P expects continuity in economic reforms and fiscal policies, supporting growth and fiscal consolidation efforts.