Fitch Reaffirms India's Rating Amid Growth and Challenges

On August 25, 2025, Fitch Ratings reaffirmed India's long-term foreign-currency issuer default rating at 'BBB-' with a stable outlook, citing the nation's robust economic growth and resilient external finances. The agency projects a gross domestic product (GDP) growth of 6.5% for the fiscal year ending March 2026 (FY26), consistent with the previous fiscal year and significantly above the 'BBB' median of 2.5%.

Despite this positive outlook, Fitch highlighted fiscal metrics as a credit weakness, noting high deficits and debt levels compared to 'BBB' peers. India's general government debt burden is estimated at 80.9% of GDP in FY25, well above the 59.6% 'BBB' median. The agency forecasts a slight rise in debt to 81.5% in FY26, as nominal growth slips. Fitch expects debt to follow only a modest downward trend to 78.5% by FY30, even as nominal growth recovers to 10.5%.

A significant external challenge is the potential imposition of U.S. tariffs. President Donald Trump has threatened to double tariffs on Indian goods to 50% in response to India's oil imports from Russia. Fitch considers these tariffs a moderate downside risk, noting that while the direct impact on GDP may be modest—given that exports to the U.S. account for 2% of GDP—the uncertainty surrounding tariffs could dampen business sentiment and investment.

In the financial markets, the Indian rupee has experienced a decline for the fourth consecutive session, closing 0.1% lower at 87.58 per U.S. dollar. This depreciation is attributed to strong dollar demand from importers and growing concerns over impending steep tariffs on Indian exports.

The affirmation by Fitch comes shortly after S&P Global Ratings upgraded India's sovereign credit rating to 'BBB' from 'BBB-', marking its first upgrade in 18 years. S&P cited India's economic resilience, sustained fiscal consolidation, and improved quality of public spending as key factors for the upgrade. The agency forecasts real GDP growth of 6.5% for the current financial year, backed by solid consumer and public investment dynamics.

In response to external challenges and to bolster domestic consumption, Prime Minister Narendra Modi has launched a $20 billion economic reform aimed at boosting domestic consumption amid rising global trade tensions and a looming 50% U.S. tariff on Indian exports. The plan includes a significant overhaul of the Goods and Services Tax (GST), simplifying the current four-rate structure to two, with reductions on daily-use goods to 5% and a few hikes on others, like cigarettes, to 40%. The move aims to enhance private consumption, which makes up 60% of India's nearly $4 trillion GDP, with economists estimating potential GDP growth of 0.6% and lowered inflation.

The reaffirmation of India's credit rating and the recent upgrade by S&P Global reflect continued confidence in India's macroeconomic stability and growth prospects. However, potential challenges loom, particularly concerning U.S. trade actions. The proposed tariffs could hinder Indian exports and widen the trade deficit, exerting further pressure on the rupee. Additionally, the uncertainty surrounding tariffs could dampen business sentiment and investment, potentially impacting employment and income levels.

Overall, while India's economic fundamentals remain strong, external factors such as potential U.S. tariffs and fiscal challenges warrant close monitoring. The government's proactive policy reforms aim to bolster domestic consumption and maintain economic stability amid global uncertainties.