Moody’s retains India’s sovereign rating at 'Baa3' with stable outlook

Moody’s Ratings on Monday retained India’s sovereign credit rating at ‘Baa3’ with a stable outlook, citing the country’s strong growth prospects and resilient domestic demand, even as fiscal weaknesses and high debt affordability constraints persist.

The rating agency said India’s long-term local- and foreign-currency issuer ratings and local-currency senior unsecured rating remain at Baa3, while its short-term local-currency rating stays at P-3. The outlook continues to be stable.

“India’s prevailing credit strengths … will be sustained,” Moody’s said, highlighting domestic demand as a buffer against external headwinds, including high US tariffs and other global policy shifts that could dampen investment in manufacturing.

Moody’s expects India’s economy to expand 6.5% in the fiscal year ending March 2026, maintaining its position as the fastest-growing G20 economy.

Moody’s noted that the government remains on track to narrow the fiscal deficit to 4.4% of GDP in 2025-26, close to its 4.5% target. However, it flagged that measures to boost private consumption, such as raising income tax thresholds and consolidating GST rates, have eroded the tax base and will constrain improvements in debt affordability.

"Strong GDP growth and gradual fiscal consolidation will lead to an only very gradual decline in the government's high debt burden, and will not be sufficient to materially improve weak debt affordability, especially as recent fiscal measures to reinforce private consumption erode the government's revenue base," it said.

Moody’s said India’s long-term local currency bond ceiling remains at A2, and the foreign-currency bond ceiling at A3.

"The four-notch gap between the LC ceiling and issuer rating reflects modest external imbalances as represented by persistent, albeit narrow, current account deficits; a relatively large government footprint in the economy; and moderate predictability and reliability of government policies," it said.

It also flagged elevated environmental and social risks, citing vulnerability to climate shocks, income inequality, and uneven access to services, although governance strength was broadly in line with peers.

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.