Morningstar DBRS raises India’s credit rating, citing resilient banking sector and fiscal reforms

Global sovereign credit rating agency Morningstar DBRS on May 9 upgraded India’s Long-Term Foreign and Local Currency – Issuer Ratings from BBB (low) to BBB with a Stable trend. In addition, India's Short-Term Foreign and Local Currency Issuer Ratings were also raised to R-2 (high) from R-2 (middle) with a Stable outlook.

The rating upgrade reflects Morningstar DBRS's assessment that the cumulative and ongoing benefits of India’s structural reforms are contributing to fiscal consolidation and supporting the country’s robust growth trajectory. The upgrade also acknowledges the enhanced resilience of India’s banking system.

India’s successful implementation of reforms, coupled with significant infrastructure investments and rapid digitalization, has helped the country recover swiftly from the pandemic. Between FY22 (April 2021 to March 2022) and FY25, India's GDP has expanded at an impressive average rate of 8.2%. The fiscal consolidation process remains on course, with improvements in government account transparency and the quality of public spending.

Furthermore, Indian banks are in a strong position to support continued growth. The non-performing loans-to-total loans ratio has decreased to 2.5%, marking the lowest level in 13 years.

Morningstar DBRS suggested that India's credit rating could see further improvements if the country continues to implement reforms that boost investment and enhance medium-term growth prospects. The agency also noted that despite the current public debt levels, the risks to debt sustainability remain limited, thanks to the local currency denomination and long maturity structures of India’s debt. Continued reforms and a reduction in the public debt-to-GDP ratio could pave the way for further upgrades.

From a cyclical perspective, India's macroeconomic balances appear sound. Inflation has returned to the Reserve Bank of India’s (RBI) target range of 4±2 percent, while the external sector remains robust. A sound policy framework has enabled India to navigate global challenges. While the imposition of U.S. tariffs has created some uncertainty, India remains well-positioned due to its limited exposure to goods exports to the U.S. and the domestic-driven nature of its economy.

Despite ongoing tensions in Kashmir, Morningstar DBRS expects these regional issues to remain contained and believes they will not significantly affect India's medium-term growth prospects or creditworthiness.

The pandemic caused India’s public debt-to-GDP ratio to rise from 75% in FY20 to 88.4% in FY21. However, following the economic recovery and the removal of stimulus measures, the ratio has decreased to 80.4% in FY25. India's weighted average cost of borrowing remains high at 7.3%, and interest payments as a percentage of GDP are elevated at 5.4%, higher than its emerging market peers. Nevertheless, Morningstar DBRS remains optimistic about a steady but gradual consolidation of fiscal accounts in the coming years, bolstered by India’s growth prospects and digital fiscal efficiency measures. The IMF’s latest World Economic Outlook projects that India's general government debt ratio will gradually decline to 78.3% by 2030.

Despite the relatively high public debt ratio, Morningstar DBRS assesses the risks to India’s debt sustainability as low.

The rating scale used by Morningstar DBRS is aligned with those of Fitch and S\&P, though Morningstar DBRS uses 'high' and 'low' suffixes, compared to the '+' and '–' designations used by Fitch and S&P.