Fitch affirms India at 'BBB-' with stable outlook, says tariff impact on GDP will be 'modest'

Fitch Ratings on Monday affirmed India's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB-' with a Stable Outlook, saying that the country's ratings are supported by its robust growth and solid external finances.

India's economic outlook remains strong relative to peers, even as momentum has moderated in the past two years, said the rating agency. "We forecast GDP growth of 6.5% in the fiscal year ending March 2026 (FY26), unchanged from FY25, and well above the 'BBB' median of 2.5%."

Fitch said that domestic demand will remain solid, underpinned by the ongoing public capex drive and steady private consumption. However, private investment is likely to remain "moderate", particularly given heightened US tariff risks. The firm said that there has been a notable slowdown in nominal GDP growth, which it forecasts to expand 9.0% in FY26, from 9.8% in FY25 and 12.0% in FY24.

Tariff Risks
The agency said,that the direct impact on GDP will be modest as exports to the US account for 2% of GDP, but tariff uncertainty will dampen business sentiment and investment. The Trump administration is planning to impose a 50% headline tariff on India by 27 August, although Fitch believes this will eventually be negotiated lower.

Moreover, India's ability to benefit from supply chain shifts out of China would be reduced if US tariffs ultimately remain above that of Asian peers, it said. "Proposed goods and services tax (GST) reforms, if adopted, would support consumption, offsetting some of these growth risks."

Room for rate cut
Fitch said that low inflation will provide space for one more 25bp cut in 2025. Falling food prices and policy actions by the Reserve Bank of India (RBI) have kept inflation contained. Core inflation is stable around the 4% mid-point of the RBI's 2%-6% target band. Headline inflation fell to 1.6% in July, driven primarily by easing food prices. The RBI cut its policy repo rate 100bp to 5.5% between February and June 2025.

Credit growth slowed to 9.0% in May from 19.8% a year earlier due to high policy rates and tighter macroprudential measures on unsecured consumer credit.

However, we expect credit growth to pick up on the monetary easing, it added.

Medium-Term Outlook
Fitch estimates potential GDP growth of 6.4%, led by strong public capex, a private investment pick-up and favourable demographics. "We assume healthy corporate and bank balance sheets will spur an investment acceleration, but this may depend on better visibility over the domestic consumption outlook."

"The government's deregulation agenda and GST reforms should support incremental growth. Passage of other significant reforms, especially on land and labour laws, seems politically difficult. Still, some state governments are likely to advance such reforms. India has signed several bilateral trade agreements, but trade barriers remain relatively high."

Fiscal Credibility Improving
The agency said, strong revenue growth and reductions in subsidy spending drove consolidation even as capex spending rose steadily to 3.2% of GDP in FY24 from around 1.5% in FY19, which should help reduce infrastructure gaps and boost potential growth.

In recent years, the central government (CG) has bolstered fiscal transparency, enhanced spending quality, and demonstrated commitment to a path of steady, though gradual, fiscal consolidation by achieving or outperforming budget targets. The CG deficit fell to 4.8% of GDP in FY25 from 5.5% in FY24 and a peak of 9.2% in FY21.

Modest Deficit Reduction Forecast
Fitch has forecast the CG deficit to decline to 4.4% of GDP in FY26, meeting the FY22 budget objective of reaching a 4.5% deficit in FY26. Revenue may underperform as nominal GDP growth slows, but we think spending will be managed to reach the target, it said.

"We expect deficit reduction to slow after FY26, with a fall to 4.2% of GDP in FY27 and 4.1% in FY28. Capex is likely to stay high and the current Pay Commission review will increase civil servant salaries amid more limited space for subsidy cuts and the potential for slightly revenue-negative GST reforms."

A shock could lead to slippage, but the CG has shown a preference to keep deficits contained, it added.

The rating agency expects the general government (GG) deficit to narrow to 7.3% of GDP in FY26 (2025 BBB median: 3.5%) and 7.0% by FY28 from a Fitch-estimated 7.8% in FY25. "We estimate the aggregate state deficit rose to 3.0% of GDP in FY25, but will stabilise at 2.9% starting FY26."

Structural Fiscal Weaknesses
India's GG debt burden is elevated at a Fitch-estimated 80.9% of GDP in FY25, well above the 59.6% 'BBB' median. "We forecast a slight rise in debt to 81.5% in FY26, as nominal growth slips. We expect debt to follow only a modest downward trend to 78.5% by FY30, even as nominal growth recovers to 10.5%. If nominal growth persists at below 10%, debt reduction could become challenging. Medium-term fiscal policy will now be anchored by the CG's new objective of reducing CG debt to 50% (+/-1%) by FY31, from 56.1% in FY26, per budget estimates."

The government finances the high debt in its domestic market with limited foreign participation and a low share of foreign-currency debt in total debt at around 3% (BBB median: 30%), said Fitch.

"However, the interest/revenue ratio, at near 23.5%, remains elevated, well above the 9% 'BBB' median, constraining fiscal flexibility to pursue alternative spending objectives. We forecast a slight decline in this ratio to 22.7% by FY28 due to falling interest rates, but it is likely to remain a key weakness in India's credit profile for some time."

Strong External Finances
India's external finances remain a rating strength, underpinned by high FX reserves, a net external creditor position, and a low current account deficit (CAD).

Fitch forecasts a stable CAD at 0.7% of GDP in FY26 before rising gradually to a still modest 1.5% by FY28. FX reserves rose by USD59 billion to USD695 billion by 15 August 2025 from end-December 2024, around eight months of current external payment coverage.