Credit ratings agency Fitch on Tuesday affirmed India's sovereign rating at 'BBB-', citing robust growth balanced against still-weak fiscal metrics that it reckons could face pressure from rising concerns over youth unemployment.
Fitch said macroeconomic stability and improving policy credibility would underpin India's growth despite near-term macroeconomic headwinds from an energy shock stemming from the conflict in the Middle East.
Fitch has rated India at 'BBB-' since 2006, while Moody's has retained its 'Baa3' rating since June 2020. S&P Global Ratings, meanwhile, upgraded India by a notch to 'BBB' last year.
The agency expects India's economy to grow at 6.4% in real terms in financial year 2027, weaker than the average growth rate over the previous three years but still well above the median in its credit rating category.
India's economy grew at 7.8% year-on-year in the January-March quarter while retail inflation in June stood at 4.38%, marginally above the central bank's 4% medium-term target.
"There are residual risks from uncertainty related to the U.S.-Iran conflict, given India's position as a large net energy importer, but we do not expect a durable risk to growth prospects," the agency said.
It noted that while India's inflation appears anchored and fiscal policy has limited inflation pass-through from elevated energy costs, the RBI is still expected to deliver a 25-basis-point rate hike later this year to tackle second-round effects from the oil shock and El Nino risks.
Although robust growth, contained inflation and strong external buffers offer comfort, Fitch said that high deficits and lagging structural metrics such as governance indicators and gross domestic product per capita were constraints to India's rating.
India's government debt is elevated at 84.4% of GDP in FY26, per Fitch's estimate, well above the 57.0% 'BBB' median.
"We forecast debt to decline slowly to around 79% by FY31, assuming medium-term nominal GDP growth of 10.5%," the agency said.
FITCH POINTS TO POLITICAL RISKS OVER SPENDING
The rating action comes as India navigates the most severe energy supply disruption in history which has sparked large capital outflows from local assets and pummelled the rupee to record low levels.
Amid the challenging environment, Fitch also pointed out that India's external finances remain solid. The agency expects the country's foreign exchange reserves (INFXR=ECI) to rise to $733 billion by the end of fiscal year 2027.
The firm also noted that further gains for Prime Minister Narendra Modi's Bharatiya Janata Party (BJP) in state-level elections would support the implementation of policy priorities.
However, "recent protests, stemming from leaked medical exams, may point to rising concerns among youth over employment opportunities, risking fiscal spending pressures over time," it added.
