Fitch affirms India sovereign rating at 'BBB-' with stable outlook; high debt remain key constraint

Fitch Ratings on Monday affirmed India’s sovereign rating at ‘BBB-’ with a stable outlook, citing robust economic growth and solid external finances, but warned that high fiscal deficits and debt levels remain key credit weaknesses.

The ratings agency forecast India’s gross domestic product (GDP) will expand 6.5% in the fiscal year ending March 2026 (FY26), unchanged from FY25 and well above the median 2.5% growth expected for peers in the ‘BBB’ category.

On August 14, S&P Global Ratings upgraded India's sovereign rating by a notch to 'BBB', from 'BBB-', with a stable outlook -- its first upgrade for India in over 18 years.

Growth will continue to be driven by strong public capital spending and steady private consumption, though investment sentiment could be dented by heightened US tariff risks.

“India’s ratings are supported by its robust growth and solid external finances,” Fitch said. “A strengthening record on delivering growth with macro stability and improving fiscal credibility should drive steady improvement in its structural metrics.”

It said India's economic outlook remains strong relative to peers, even as momentum has moderated in the past two years.

"Proposed goods and services tax (GST) reforms, if adopted, would support consumption, offsetting some of these growth risks," Fitch added.

The Trump administration has threatened to impose an additional 25% tariff on Indian goods as soon as August 27, taking the cumulative tariff to 50%, but Fitch said it expects that figure to be negotiated lower.

The direct hit to GDP is seen as modest, since US exports account for about 2% of India’s economy, but the uncertainty could weigh on business confidence.

Low inflation, room for rate cuts

Headline inflation eased to 1.6% in July, driven by falling food prices, while core inflation held near the Reserve Bank of India’s (RBI) 4% target mid-point.

The RBI has cut policy rates by 100 basis points this year to 5.5% and could deliver one more cut in 2025, Fitch said.

Credit growth slowed sharply to 9% in May from nearly 20% a year earlier, but is expected to recover as monetary conditions ease.

Fiscal position remains a constraint

India has made progress in fiscal consolidation, with the deficit narrowing to 4.8% of GDP in FY25 from 5.5% the year before.

Fitch expects the deficit to fall further to 4.4% in FY26, meeting New Delhi’s medium-term target.

However, the general government debt remains elevated at about 81% of GDP, compared with the ‘BBB’ median of about 60%.

Fitch projects only a modest decline in the ratio over the next five years, constrained by slowing nominal growth and high interest costs, which consume nearly a quarter of government revenue.

External buffers strong

India’s external finances are a key support for the rating, Fitch said, pointing to record foreign exchange reserves of $695 billion as of mid-August, equivalent to eight months of external payments.

The current account deficit is expected to remain modest at 0.7% of GDP in FY26.