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Fitch Ratings has affirmed India’s sovereign credit rating at BBB- with a stable outlook, citing the country’s robust economic growth
Indian economic growth
Fitch Ratings on Monday affirmed India’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at BBB- with a Stable Outlook, noting that the rating is underpinned by the country’s robust growth prospects and solid external finances.
The agency said India’s economic outlook remains strong relative to peers, even though momentum has moderated over the past two years. It forecast GDP growth at 6.5% in FY26, unchanged from FY25 and significantly above the ‘BBB’ median of 2.5%. Growth, Fitch added, will continue to be driven by strong public capital expenditure and steady private consumption, although private investment is likely to remain moderate due to risks from potential US tariff hikes.
Growth Outlook and Tariff Risks
Fitch projects nominal GDP growth to slow to 9.0% in FY26 from 9.8% in FY25 and 12.0% in FY24. While exports to the US represent only 2% of GDP, the planned 50% headline tariff by the Trump administration (effective August 27) poses risks to investment sentiment. Fitch expects the final tariff to be negotiated lower but warned that sustained higher tariffs compared to Asian peers could erode India’s competitiveness in global supply chains.
Proposed GST reforms, if implemented, could help offset some of these growth risks by boosting consumption.
Room for Monetary Easing
Fitch highlighted that India’s low inflation provides space for an additional 25 bps rate cut in 2025. Falling food prices and effective RBI policy actions have kept inflation contained. Core inflation remains stable near the midpoint of the RBI’s 2%-6% target range, while headline inflation dropped to 1.6% in July due to easing food prices.
The RBI has already cut the repo rate by 100 bps to 5.5% between February and June 2025. Credit growth, however, slowed to 9.0% in May from 19.8% a year earlier, owing to tight monetary policy and restrictions on unsecured consumer credit. Fitch expects lending to recover as monetary conditions ease.
Medium-Term Growth Drivers
The agency estimates India’s potential GDP growth at 6.4%, supported by strong public capex, favourable demographics, and a gradual revival of private investment. Fitch assumes healthier corporate and bank balance sheets will drive investment acceleration, though much depends on a stable consumption outlook.
While reforms to land and labour laws remain politically difficult at the national level, some states may push ahead. Additionally, India’s deregulation agenda, GST reforms, and multiple bilateral trade agreements are expected to provide incremental growth support, even as trade barriers remain relatively high.
Fiscal Position and Consolidation
Fitch noted that strong revenue growth and reduced subsidy spending have allowed the government to pursue consolidation while raising capex from 1.5% of GDP in FY19 to 3.2% in FY24, helping bridge infrastructure gaps. Fiscal transparency and adherence to budget targets have improved credibility.
The central government (CG) deficit narrowed to 4.8% of GDP in FY25 from 5.5% in FY24 and a peak of 9.2% in FY21. Fitch projects it will further decline to 4.4% in FY26, in line with the FY22 budget target of 4.5%. While slower nominal GDP growth could affect revenues, Fitch expects spending adjustments to help maintain targets.
The general government (GG) deficit is forecast to narrow to 7.3% of GDP in FY26 (vs. 7.8% in FY25) and to 7.0% by FY28, though this remains well above the BBB median of 3.5%. State deficits are expected to stabilise around 2.9% of GDP from FY26 onwards.
Debt Burden and Medium-Term Fiscal Anchors
India’s GG debt is estimated at 80.9% of GDP in FY25, compared with the BBB median of 59.6%. Fitch expects debt to edge up to 81.5% in FY26 as nominal growth slows, before trending modestly downward to 78.5% by FY30, assuming nominal growth averages 10.5%. However, if growth stays below 10%, debt reduction could be more challenging.
The government’s new fiscal anchor aims to reduce CG debt to 50% (+/-1%) of GDP by FY31, down from 56.1% in FY26 as per budget estimates. Fitch said this would support medium-term fiscal sustainability, though risks remain if growth weakens or reforms stall.
Aparna Deb is a Subeditor and writes for the business vertical of News18.com. She has a nose for news that matters. She is inquisitive and curious about things. Among other things, financial markets, economy, a…Read More
Aparna Deb is a Subeditor and writes for the business vertical of News18.com. She has a nose for news that matters. She is inquisitive and curious about things. Among other things, financial markets, economy, a… Read More
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