S&P Global Ratings announced a shift in India's sovereign rating outlook from "stable" to "positive" on Wednesday, attributing it to the country's robust economic fundamentals. However, the rating itself remained at "BBB-".
Yeefarn Phua, director of sovereign and international public finance ratings at S&P, highlighted the importance of monitoring the government's fiscal consolidation path over the next two years for a possible ratings upgrade. India aims to reduce its fiscal deficit to 4.50% of GDP by the end of 2025/26, down from an expected 5.8% in 2023/24.
The transfer of surplus from the Reserve Bank of India (RBI) to the government for the fiscal year 2023-24 is expected to bolster the fiscal position. However, the use of these funds by the government—whether to reduce the fiscal deficit or increase spending—remains a key consideration.
Phua also emphasized India's ability to finance its deficit domestically in local currency, which would positively impact future ratings. Additionally, S&P is monitoring the RBI's effectiveness in managing inflation expectations.
Geeta Chugh, managing director of financial institutions ratings at S&P, noted that Indian banks are projected to maintain strong financial performance in the next 12-24 months, driven by robust economic growth. Despite deposit growth trailing credit growth amid tight liquidity conditions, Chugh stated that competition for deposits among banks is expected to be manageable.
