S&P upgrades India ratings to BBB (stable); macro justice at last

18 Aug 2025 , 01:20 PM

MACRO JUSTICE; IRONIC BUT WELCOME

While the rating upgrade by S&P was long-anticipated, the timing of the upgrade was rather surprising. The upgrade from BBB- to BBB for Indian sovereign ratings, with Stable outlook, was befitting considering that India is already the fourth largest economy in the world by GDP. India has also been the fastest growing large economy for last 3 years in a row. For such an economy, a BBB- rating (just above speculative), was not befitting.

The rating upgrade was also ironic for a very specific reason. It comes just a few days after the President of the US virtually wrote of the Indian economy as “Dead” and punished the Indian economy with 50% tariffs. Under these circumstances, an affirmative upgrade coming from one of the largest US-based rating agencies, has a tinge of irony. Having said that, in the present circumstances; such an upgrade is surely welcome.

Back in May 2024, S&P had raised the outlook for the Indian economy from Stable to Positive. In that light, a rating upgrade after a year, looks logical. In May 2024, the outlook had been upgraded due to GDP growth and the quality of government expenditure, which has cleared veered towards capex. Here are the 3 factors that triggered this upward shift in sovereign rating for India.

• PROGRESS ON FISCAL CONSOLIDATION

The central government has shown a lot of prudence, budget after budget, on fiscal deficit management. Despite the fiscal deficit burgeoning to 9.2% in the aftermath of the pandemic, it has already been brought down to 4.8% in FY25 and targets 4.4% in FY26, before stabilizing at 4.0%. While fiscal consolidation was helped along the way by robust revenues in last few years, the government has also improved the quality of its spending by focusing less on revenue spending and more on capex. That has led to fiscal consolidation without compromising on growth.

• STABLE EXTERNAL POSITION

The strong forex reserves position of the Indian economy at around $700 Billion, has given the Indian economy the leeway to ensure stability of the rupee. The rupee has been managed in a range by the RBI and the forex reserves continue to be sufficient to cover over 10 months of imports. More importantly, the government has leveraged Russian oil  imports to keep the merchandise trade deficit in check; while boost the services surplus. That has kept the current account deficit (CAD) at around 0.5% of GDP for 2 years in a row. In fact, CAD is expected  to be around 1.0% of GDP till 2028.

• ANCHORING INFLATION EXPECTATIONS

Apart from a robust Rabi and Kharif, India has also gained from supply side reforms taken up by the Indian government. RBI has also synchronized its repo rate management in order to keep inflation in check. From a peak of near-double-digit inflation in 2022, the consumer inflation in India has fallen to 1.55% in July 2025. The full year inflation expectations are now well below the RBI median of 4%. Smart management of fuel costs, immunity from global supply chain constraints, and a robust domestic market have kept imported inflation at bay.

WILL THIS RATING UPGRADE HELP INDIA?

It certainly will! The rating upgrade is acknowledgement that there have been significant improvements in India’s economic position and economic heft. One can argue that the upgrade came too late, but it is still welcome. At a time, when India needs to chart its own path, amidst a hostile West, this rating upgrade will go a long way. Not only does it enhance the ability of Indian companies to raise funds in global bond markets, but also makes more global investors interested in India. One can remonstrate about India’s debt/GDP ratio and per capita income, but these are long term challenges. For now, the verdict by S&P Global on India is affirmative and clear!