Indian Prime Minister Narendra Modi arrives at the Bharatiya Janata Party (BJP) headquarters in New Delhi, India, on Sunday, December 3, 2023. The victory over the opposition in the election strengthened Modi’s bid for a third term.
Prakash Singh | Bloomberg | Getty Images
S&P Global Ratings raised India’s sovereign rating outlook to “positive” from “stable” while maintaining its “BBB-” rating, saying on Wednesday that the country’s strong economic expansion had a constructive impact on its credit indicators.
“We expect sound economic fundamentals to support growth momentum over the next two to three years,” S&P said, adding that regardless of the scenario, election As a result, it foresees broad continuity in economic reforms and fiscal policy.
India’s marathon six-week national election, the world’s largest, is in its final stages, with vote counting set to take place on June 4, and investors are gaining ground for Prime Minister Narendra Modi Preparing for the third term.
Finance Minister Nirmala Sitharaman called the upgrade a “welcome development”.
“This reflects India’s solid growth performance and promising economic prospects in the coming years,” the social media post said.
The rating agency said India’s positive outlook is based on its strong economic growth, significant improvement in the quality of government spending and political commitment to fiscal consolidation.
“We believe these factors are combining to benefit credit metrics,” S&P analysts wrote in a note.
After the upgrade to the outlook, the Indian rupee came off the day’s lows and the benchmark 10-year bond yield fell 3 basis points to 6.99%.
S&P said India’s weak fiscal environment has been the most vulnerable component of its sovereign rating.
High fiscal deficits, large debt stocks and interest burdens remain, but the government is prioritizing ongoing consolidation efforts, the report added.
“With the economic recovery now on track, the government is once again able to chart a more concrete, albeit gradual, path to fiscal consolidation,” S&P analysts said.
“Our forecasts indicate that the government deficit will be 7.9% of GDP in fiscal 2025, declining slowly to 6.8% in fiscal 2028.”
Standard & Poor’s expects India’s economy to grow at an annual rate of nearly 7% over the next three years, which will have a moderating effect on the government debt-to-GDP ratio despite a higher fiscal deficit.
Its favorable GDP growth and interest rate spreads keep government borrowing sustainable, S&P said, adding that it expects the country’s debt-to-GDP ratio to fall to 81% by fiscal 2028 from 85% currently.
The continued slowdown in price growth has enabled the central bank to end monetary tightening, and S&P expects to adopt a moderately loose monetary policy stance before the end of fiscal 2025.
If the fiscal deficit narrows significantly, bringing general government debt below 7% of GDP on a structural basis, or if it observes a sustained and substantial improvement in the effectiveness of the RBI’s monetary policy and inflation credibility, the agency may increase its forecast. India’s ratings report remains low for the long term.
Alternatively, the outlook could be revised to stable if the agency finds that political commitment to maintaining sustainable public finances has eroded, or that the current account deficit widens significantly, weakening India’s external position.
“We will continue to have fruitful engagement with them to demonstrate economic strength and potential rating upgrades,” Economic Affairs Minister Ajay Seth told Reuters.
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