Sovereign Rating - Newspaper Summary

 The sources provide a comprehensive view of India's Sovereign/Debt and Ratings landscape in September 2025, highlighting a juxtaposition of robust economic growth and lingering fiscal weaknesses, all set against a backdrop of significant global uncertainty driven largely by US trade policy.

Sovereign Ratings Status and Context

India's sovereign credit rating, crucial for international borrowing and investor confidence, remains stable according to major rating agencies.

• Moody's Rating: Moody's Ratings affirmed India's credit rating at 'Baa3' and maintained a stable outlook. The 'Baa3' rating is categorized as the lowest investment grade rating.
• Recent Upgrades: This stable status is reported alongside recent positive movements from other agencies. Japan’s Rating and Investment Information Inc. (R&I) raised India's long-term rating to BBB+ from BBB with a stable outlook. S&P Global and Morningstar DBRS also upgraded India's ratings earlier in August and May 2025.
• Significance: These rating gains are deemed significant because they occurred amid global uncertainty and geopolitical volatility. The Union finance ministry noted that India earned its third sovereign ratings upgrade in fiscal year 2025 due to steady growth, macroeconomic stability, and credible fiscal discipline over the past few years.

Credit Strengths and Resilience

The stable outlook and investment-grade ratings are fundamentally rooted in several core strengths of the Indian economy.

• Economic Fundamentals: Moody's affirmation reflects the view that India’s prevailing credit strengths—a large, fast-growing economy, and a sound external position—will be sustained.
• Growth Potential: India's credit profile benefits from its strong growth potential, underpinned by a large domestic market and favorable demographics that support resilient, demand-driven expansion. This internal demand helps insulate the economy from external shocks.
• Domestic Financing: India benefits from a stable domestic financing base for ongoing fiscal deficits.
• External Headwinds Mitigation: These inherent strengths lend resilience to adverse external trends, particularly high US tariffs and other international policy measures that could hinder India’s capacity to attract manufacturing investment.

Fiscal Weaknesses and High Debt Burden

Despite the strong growth narrative, Moody's highlights long-standing fiscal weaknesses that balance India's credit strengths.

• Debt Affordability: The agency indicates that strong GDP growth and gradual fiscal consolidation will only lead to a very gradual decline in the government’s high debt burden. This gradual reduction will not be sufficient to materially improve weak debt affordability.
• Erosion of Revenue Base: Recent fiscal measures aimed at reinforcing private consumption, such as increased income tax thresholds and the consolidation of Goods and Services Tax (GST) rates announced in September, are expected to erode the government's revenue base. Moody’s cautioned that these developments narrow the tax base and result in foregone revenue, thereby curtailing potential improvements in debt affordability.
• Fiscal Risk Warning: Moody's cautioned that fiscal accommodation (especially revenue-eroding measures) in the context of the uncertain global macroeconomic outlook could impede progress towards debt reduction and exacerbate already weak debt affordability.
• Bond Market Impact: Concerns regarding India's fiscal position are impacting financial markets. Escalating risks of fiscal slippage, due to subdued tax buoyancy, are overshadowing the bond market outlook with worries about additional government supply of debt instruments. Furthermore, the G-sec market is experiencing spillover pressures from elevated State Development Loan (SDL) issuances.

Global and Indian Economic Landscape (Sep 2025)

The ratings and debt profile are closely tied to the volatile global and domestic economic environment.

1. External Shocks and Trade Tensions:

• US Tariffs: The Trump administration imposed an unexpectedly high reciprocal tariff of 25% on merchandise imports from India, followed by an additional 25% punitive tariff due to India's continued engagement in trade involving cheap Russian oil.
• Impact on Exports: This 50% tariff threatens sectors such as textiles, gems and jewellery, electronics, and pharmaceuticals. Although merchandise exports to the US are only about 2.2% of India’s GDP, the direct effect on affected sectors is damaging, and the resulting widening of the trade deficit could be significant.
• IT Services Headwind: The US decision to raise H-1B visa fees to $100,000 makes it extremely expensive to hire foreign professionals, directly impacting India's vital IT services sector, which provides on-site support crucial for overall service exports and remittance flows.
• India's Response: India is continuing trade negotiations for Free Trade Agreements (FTAs) with several countries, including the US, EU, New Zealand, Oman, Peru, and Chile, as part of a trade diversification push to mitigate risks from tariff shocks.

2. Monetary Policy and Liquidity:

• RBI's Dilemma: The Reserve Bank of India (RBI) faces an "enviable dilemma" ahead of its October 1 policy decision, as economic growth is on a steady incline and inflation is well under control.
• Rate Decision: While benign inflation (expected sub-3% for FY26) suggests room for a rate cut, experts recommend a policy pause to preserve flexibility amidst evolving growth risks and uncertainty related to US tariffs. A dovish forward guidance is suggested instead of an immediate rate cut to reassure markets.
• Liquidity Management: The banking system currently has a surge in liquidity (estimated at ₹3-4 trillion). However, experts caution that durable liquidity could drain down towards ₹1.5 trillion by the end of FY26, requiring agile intervention from the RBI to avert a potential credit squeeze.

3. Investment and Growth:

• Private Capex Uncertainty: Private sector investment optimism remains 'tepid'. Investment intentions fell in 2024-25, and companies remain cautious due to global geopolitical and trade tensions, especially the uncertainty caused by Trump tariffs.
• FDI Environment: To fuel economic growth, the government is planning to simplify FDI processes and reduce red tape, recognizing that FDI brings essential capital, technology, and expertise. While FDI inflows rose 15% in Q1 FY26, this growth rate has slowed compared to the previous year.
• GDP Growth: Despite headwinds, India's FY26 GDP growth forecast has been revised upwards to 6.5% by agencies like Icra. This growth is supported by increased government capital expenditure and strong domestic consumption boosted by recent fiscal relief measures (GST cuts, income tax relief).