Fitch Ratings has reaffirmed India’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BBB-’ with a Stable Outlook, citing strong growth prospects and resilient external finances. While high public debt continues to weigh on the credit profile, the rating reflects confidence in India’s economic fundamentals and policy reforms.
Limited Impact of US Tariffs
A key risk highlighted by Fitch stems from US President Trump’s plan to impose a 50% tariff on Indian goods from August 27, 2025. However, the direct impact is expected to be modest, as exports to the US account for only about 2% of India’s GDP.
That said, Fitch cautioned that prolonged tariff measures could hurt business sentiment, investment flows, and India’s ability to benefit from global supply chain shifts, particularly if competing Asian peers enjoy more favourable trade terms.
Growth Drivers and Outlook
For FY26, Fitch projects GDP growth of 6.5%, supported by:
- Public capital expenditure on infrastructure and development projects
- Steady private consumption backed by favourable demographics
- Reforms such as GST and deregulation, which continue to improve business efficiency
Broader structural reforms in land and labour markets remain politically challenging at the national level, though state-led initiatives are expected to provide incremental progress.
Fiscal Position and Government Spending
India’s fiscal deficit is projected to narrow gradually:
- 4% of GDP in FY26
- 2% in FY27
- 1% in FY28
Fitch noted that high government spending on capital projects will persist, while the upcoming Pay Commission review is expected to raise civil servant salaries. At the same time, subsidy cuts remain limited, and some aspects of GST reform may prove slightly revenue negative. This could keep fiscal space constrained, making deficit reduction a gradual process.
Inflation and Monetary Policy
Inflation trends provide comfort to policymakers. Headline inflation dropped to 1.6% in July 2025, largely due to easing food prices. Meanwhile, core inflation remains stable at around 4%, well within the Reserve Bank of India’s (RBI) target band.
This benign inflation outlook could allow the RBI to cut interest rates further, possibly by another 25 basis points in 2025, providing additional policy support for growth.
Overall Assessment
Fitch’s rating underscores India’s strong growth relative to global peers, balanced against challenges of high public debt, fiscal constraints, and external trade risks. While the direct impact of US tariffs may be modest, sustained trade pressures could influence long-term competitiveness.
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