MUMBAI: The third major global rating agency Moody’s Ratings has reaffirmed its Baa3 (BBB-) sovereign rating on the country and retained the outlook at stable, one month after rival Fitch also maintained the rating at the lowest investment-grade level. On the other hand, the largest agency S&P had on August 14 upgraded the country to BBB from BBB- for the first time in 18 years.
“The rating affirmation of BBB- rating and stable outlook reflect our view that India’s prevailing credit strengths including its large, fast-growing economy, sound external position and stable domestic financing base for ongoing fiscal deficits will be sustained,” Moody’s said in a note from Singapore on Monday.
"These strengths lend resilience to adverse external trends, in particular as high US tariffs and other international policy measures hinder India’s capacity to attract manufacturing investment,” its analysts Christian de Guzman and Gene Fang said.
The government has over the past several years aggressively pursued these three global agencies for higher ratings that, in its opinion, better reflect the economy’s fundamentals. In fact, New Delhi has repeatedly expressed its displeasure over these agencies saying their methodologies are biased against emerging economies.
According to Moody’s, the government finances are “long-standing weaknesses” preventing it from a rating upgrade and they will remain so.
“Strong GDP growth and gradual fiscal consolidation will lead only to a very gradual decline in the high government debt, and will not be sufficient to materially improve weak debt affordability, especially as recent fiscal measures to reinforce private consumption erode the government revenue base,” the agency said, referring to the income tax cuts in the budget and the recent cut in GST rates.
“These two moves have made the tax base narrow and will lead to loss of revenue to the government,” it added.
Interestingly, S&P Global Ratings upgraded the rating a day before Prime Minister Narendra Modi announced in his Independence Day speech that the GST would be reformed. However, S&P analysts later allayed fears about any revenue losses from the tax cuts, saying the simplification of the GST could boost the government’s revenues in the long term.
Moody’s, though, warned that the Centre and the states together have reduced their annual fiscal deficits after the Covid pandemic at a “very gradual” pace “despite robust growth boosting revenue and alleviating spending pressure”.
“Moreover, while the government has demonstrated a lengthening track record of fiscal consolidation, recent policy measures have signaled a shift towards greater support for the economy amid a weaker global macroeconomic environment,” Moody’s added.
The Centre is aiming for a fiscal deficit of 4.4% of GDP this fiscal. From next year, the government will target a reduction in its debt-to-GDP ratio from 57.1% in fiscal 2025 to 49-51% by fiscal 2031. However, states do not have a debt target and rating agencies view government debt on a consolidated basis. Moody’s said it expects the government to remain committed to its goal of gradual debt reduction over the next decade.
On the growth front, Moody’s expects the country to remain the fastest growing G20 economy at least for the next two-three years, with GDP seen rising by 6.5% this fiscal, in line with the Reserve Bank forecast. The economy surprisingly printed in at 7.8% in the first quarter ending June 2025.
Like S&P and Fitch, Moody’s also sees the impact on growth from the US’ high tariffs to have only “limited negative effects” in the near term. However, in the medium to long-run, these high tariffs could restrict potential growth “by hindering the country’s ambitions to develop a higher value-added export manufacturing sector,” Moody’s said.
Ratings are divided into two classes: investment and speculative grades. Entities in the former class are worth investing in, while repayment of loans taken by those in the latter is more difficult to predict. Within investment grade, there are several levels, with Baa3 being the lowest as per the scale followed by Moody’s. Baa3 is the equivalent of BBB- that Fitch now has India at.
A rating in the Baa category, comprising Baa1, Baa2, and Baa3, is indicative of “moderate credit risk” and “may possess speculative characteristics”.