Moody’s follows Fitch, only affirms India’s sovereign rating with stable outlook

Ratings are divided into two rough classes: investment and speculative grades. Entities, including countries, 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 currently 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”. As such, a credit rating is nothing more than a measure of an entity’s creditworthiness, or how likely it is that it may pay back borrowed money. Most countries need to borrow money every year to fund some of their expenditures. The difference between the total income and the expenditure for a year is the fiscal deficit; the Indian government’s is Rs 15.69 lakh crore for 2025-26.

The Indian government has over the last several years aggressively pursued the 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 the agencies’ methodologies, saying they were biased against emerging economies. The Economic Survey for 2020-21 even had a chapter titled ‘Does India’s Sovereign Credit Rating reflect its fundamentals No!’.

‘Long-standing weaknesses’

According to Moody’s, the government’s finances are “long-standing weaknesses” and they will remain so.

“Strong GDP growth and gradual fiscal consolidation will lead to an only very gradual decline in the government’s high debt burden, and will not be sufficient to materially improve weak debt affordability, especially as recent fiscal measures to reinforce private consumption erode the government’s revenue base,” the agency said, referring to the income tax cuts announced in the 2025-26 Union Budget and the Goods and Services Tax (GST) rate reductions that came into effect on September 22. These two moves, Moody’s said on Monday, have made the tax base narrow and will lead to loss of revenue to the government.

Interestingly, S&P upgraded its rating on India a day before Prime Minister Narendra Modi announced in his Independence Day speech that the GST will 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 on Monday that the Indian and state governments 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 per cent of GDP for the current year that will end in March. From next year, India will target a reduction in its debt-to-GDP ratio from 57.1 per cent in 2024-25 to 49-51 per cent by 2030-31. However, states do not have a debt target and rating agencies view government debt on a consolidated basis – Centre plus states. Moody’s said it expects the government to remain committed to its goal of gradual debt reduction over the next decade.

Tariff risk to growth

On the growth front, Moody’s expects India to remain the fastest growing G20 economy at least for the next two to three years, with the GDP seen rising by 6.5 per cent in the current fiscal, in line with the Reserve Bank of India’s (RBI) forecast.

The RBI’s Monetary Policy Committee began its three-day meeting on Monday and will detail its interest rate decision on Wednesday. Economists expect the central bank to upgrade its growth forecast this week due to the economy growing at a much faster pace than anticipated in the April-June quarter. At 7.8 per cent, the April-June GDP growth rate was the fastest in five quarters and a full percentage point higher than what economists had expected.

Like S&P and Fitch, Moody’s too sees the impact on India’s 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 India’s ambitions to develop a higher value-added export manufacturing sector”.

Officials from India and the US continue to negotiate a bilateral trade deal and Moody’s expects them to result in less punitive rates on India than the current 50 per cent. Meanwhile, the hike in H-1B visa fees to $100,000 for new applicants and provisions in the Halting International Relocation of Employment (HIRE) Act are not expected to “significantly weigh” on workers’ remittances or India’s services exports.