What India’s sovereign ratings upgrade by S&P means

India’s sovereign rating upgrade by S&P Global Ratings is seen to have reinforced the country’s macro-economic fundamentals and is especially pivotal coming at a time when the US has imposed 50% tariffs on India.
 
The global rating agency on Thursday upgraded India’s long-term unsolicited sovereign credit ratings on India to 'BBB' from 'BBB-' with a stable outlook, citing the country’s buoyant economic growth, against the backdrop of an enhanced monetary policy environment that anchors inflationary expectations. While pegging India’s GDP growth at 6.5% for FY26, it also said that it does not expect the 50% tariffs (if imposed) “to pose a material drag on growth”.
 
The rating upgrade comes after a period of 18 years and comes after its decision in May 2024 to revise India's outlook to positive from stable. Policymakers had for long highlighted India’s strong economic growth, fiscal discipline and reforms to global rating agencies and had called for a rating upgrade.
 
NR Bhanumurthy, Director Madras School of Economics highlighted that the rating upgrade will give higher confidence to foreign investors and more foreign capital will come into India. “The upgrade is extremely well timed and comes when India is facing the huge US tariffs. It strengthens our views on the Indian economy in the medium and long term and gives clarity on the domestic and external accounts in terms of the fiscal deficit and current account deficits respectively,” he said.
 
India, however, still has a long way to go in becoming an upper investment grade economy.
 
However, on the ground, credit ratings are seen by market participants and financiers as the measure of the ability of a borrower to repay loans and assess the probability of a default. The upgrade by S&P means that India will now be seen as a more resilient investment destination for foreign investors and the cost of funding of government debt will also come down.
 
Ranen Banerjee, Partner and Economic Advisory Leader, PwC India said the rating upgrade will be a major positive rub on currency exchange rate. “This will bring down the yields and lead to more capital flows in the country. This can also cause the overall borrowing costs for the government as well as private sector to go down,” he noted.
 
The benefits of the upgrade will also help companies lower their offshore borrowing costs and ratings of several firms could also be upgraded. Soon after its announcement of upgrading India’s sovereign ratings, S&P also upgraded raised its long-term issuer credit ratings on the Export-Import Bank of India and Indian Railway Finance Corporation to 'BBB' from 'BBB-' with a stable outlook.  It also upgraded the issuer credit ratings on ONGC, Power Grid Corporation, NTPC, and Tata Power to 'BBB' from 'BBB-'with stable outlooks.
 
Radhika Rao, Executive Director and Senior Economist at DBS Bank noted that S&P upgraded India’s credit rating higher within the investment grade universe, bringing the country on par with Indonesia, and Mexico.
 
“Positive impetus on the back of this upgrade will help lower the credit premium on the sovereign’s debt as well as further ease corporates’ offshore borrowing costs,” she said.
 
Indranil Pan, Chief Economist, YES BANK said that the ratings upgrade will be a positive for foreign flows into India, and lead to a stable currency atmosphere, thereby adding to the belief of lower financial market risks for India.”
 
Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Group pointed out that S&P’s upgrade of India’s rating is certainly a welcome development — but it is also, by any reasonable measure, too little and too late. “What market participants and India-watchers have long recognised is only now being acknowledged by the rating agencies. The reality is that India’s economic and financial dynamism has far outpaced its perceived credit risk,” he pointed out, adding that for investors, this upgrade changes little.
 
“The positive trajectory of Indian equities and other asset classes is likely to continue, propelled by the same structural strengths that have underpinned their outperformance for years — irrespective of the verdicts handed down by credit rating agencies,” he said.