From BBB to Better: Why India Deserves a Stronger Credit Rating

Taken together, these pillars underscore that India’s fundamentals are stronger than what a BBB rating alone suggests, highlighting a clear disconnect between economic reality and external perception — one that calls for a recalibration of India’s true creditworthiness.

Introduction

S&P Global Ratings’ recent decision to upgrade India’s sovereign rating from “BBB–” to “BBB” with a stable outlook is a long-awaited recognition of the country’s macroeconomic strength. It acknowledges India’s sustained GDP growth, resilient domestic demand, and improving fiscal management at a time when several large economies struggle with stagnation and rising debt burdens. For corporates, this upgrade reduces the perception of country risk, potentially lowering borrowing costs, broadening access to global capital, and improving terms of trade, joint ventures, and acquisitions.

Yet, the key question remains: does this rating truly capture India’s fundamentals? When benchmarked against BBB and even A-rated peers, India’s growth trajectory, fiscal consolidation, external resilience, banking stability, and institutional credibility present a much stronger macro profile. These pillars suggest that India’s creditworthiness is already more consistent with stronger-rated sovereigns, raising the debate on whether the current BBB level reflects the country’s true credit standing.

Growth Outperformance

Over the past decade, India has consistently delivered 6–7% real GDP growth, a level unmatched by most BBB-rated and even several A-rated peers, whose long-run average growth typically falls between 2–3%. This resilience has been tested through multiple global shocks — the 2008 Global Financial Crisis, the 2013 taper tantrum, the COVID-19 pandemic, and repeated commodity price surges — during which advanced peers often slipped into stagnation while India maintained positive momentum.

• India’s growth is anchored by its large domestic consumption base, with Private Final Consumption Expenditure (PFCE) at ~62% of GDP in FY2025. This compares to far lower ratios in export-reliant peers — for example, Thailand (50%), Malaysia (57%), and Poland (59%). The contrast underscores India’s insulation from volatile global trade cycles: while external demand weakens growth in many A-rated economies, India’s domestic demand provides a consistent stabilizer.
• A balanced sectoral composition further supports this resilience: services contribute ~54–55% of Gross Value Added (GVA), industry 27–30%, and agriculture 14–17%. This distribution reduces volatility risks seen in more narrowly based economies, ensuring broad-based momentum across cycles.
• Demographic Advantage: Additionally, India benefits from demographics (a young, expanding workforce), which embeds a higher potential growth path compared to peers. The following chart and table show percentage of the working population and the percentage of the population in the 60+ age bracket from 1950 to 2050 (expected), respectively.

  Year	1950	1990	2020	2023	2030	2050
  China	8.00	8.10	17.80	19.50	26.20	38.80
  India	5.40	6.40	10.20	10.70	12.90	20.80
  Japan	7.60	17.90	35.40	36.10	38.30	43.70

• India’s demographic profile stands out as a structural credit strength. With only ~11% of its population above 60 years in 2023, rising to just ~21% by 2050, India retains one of the youngest large working populations globally. This contrasts sharply with China, where the elderly share is projected to nearly double to ~39% by 2050, and Japan, already at 36% in 2023, will approach 44% by mid-century. For sovereign ratings, this distinction is critical: a younger population supports sustained growth, lower pension and healthcare burdens, and stronger debt affordability, while aging societies face rising fiscal pressures and slower potential growth. India’s youthful demographics, therefore, provide a long-term buffer that is under-recognized in its current BBB rating, especially when compared to higher-rated peers grappling with structural aging headwinds.

Debt Sustainability & Fiscal Space

India’s debt-to-GDP ratio, at ~81–82%, is elevated but stable, with the IMF projecting a gradual decline to ~78% by FY2029. This compares favourably with many higher-rated sovereigns: Italy (~135%), France (~110%), Belgium (~104%), and Japan (~235%). Even Germany (~63%) and Canada (~69%), though lower on headline debt, face much weaker growth trajectories, making their debt ratios more persistent.

Source: CEIC Data

Several factors enhance India’s debt sustainability:

• Structure of debt matters: Over 90% of India’s sovereign liabilities are rupee-denominated and domestically held, sharply reducing currency mismatch, refinancing pressures, and susceptibility to external shocks. This contrasts with several emerging peers that rely heavily on foreign-currency debt.
• Growing Out of Debt: India’s nominal GDP growth of 10–11% significantly outpaces its effective interest cost of 6–7%, creating a favourable “growth–interest rate” differential. This positive gap enables India to gradually ‘grow out of debt,’ as robust growth drives down debt ratios over time. In contrast, advanced economies such as Italy, France, and Japan face the opposite challenge with sluggish growth.
• Fiscal space is improving in quality: While interest payments consume ~35–38% of government revenues, among the highest globally, the ratio has been trending lower, supported by stronger tax mobilization and fiscal consolidation. More importantly, India is increasingly channelling fiscal resources into capital expenditure. The capex has risen from ~12% of the Union budget in FY2019 to ~23% in FY2025. This shift strengthens growth potential and debt sustainability.
• Capex-Led Fiscal Consolidation Despite Limited Tax Base: Although India’s fiscal space remains constrained by a modest tax-to-GDP ratio (~11–12%), the government has preserved room for capital expenditure by containing subsidies, improving GST efficiency, and pushing structural reforms. Besides, the revenue deficit has shown a sustained improvement over the years. This rebalancing has enabled record-high capex outlays while steadily narrowing the revenue deficit.
• India’s spotless repayment history, deep domestic financial markets, and the RBI’s ability to smooth borrowing programs further mitigate sovereign risk. This is reflected in resilient demand for government securities and sustained foreign investor interest, despite India’s relatively low BBB rating.

External Resilience

India’s external buffers are among the strongest in the BBB category and compare favourably even with select A-rated peers. As on August 15, 2025, the foreign exchange reserves of USD 695 billion, equivalent to ~11 months of imports and covering over 90% of external debt, place India well ahead of most BBB sovereigns, which typically hold 6–8 months of cover, and stronger than several A-rated economies.

India’s sovereign external debt remains low and predominantly long-dated, while the bulk of foreign-currency liabilities is concentrated in the private sector and subject to prudential limits and hedging requirements. At ~19% of GDP, gross external debt is moderate for a large emerging market, with short-term maturities comfortably covered by forex reserves. This composition significantly reduces rollover and Forex-mismatch risks. By contrast, several higher-rated peers — including Malaysia, Poland, Japan, and Belgium — carry substantially higher external debt ratios, much of it denominated in foreign currency, exposing them to greater vulnerability.

India’s resilience is also reflected in its Guidotti–Greenspan ratio — the benchmark that compares reserves to short-term external debt (STED) by residual maturity. At ~2.2x in March 2025, India’s reserves cover more than double its one-year obligations, comfortably exceeding the 1x threshold. While some peers such as the Philippines, Mexico, and Israel show higher ratios, India’s combination of a very large absolute reserve stock (~USD 668 bn) and strong coverage, places it above several BBB sovereigns and even some A-rated economies. This underscores India’s robust capacity to withstand sudden stops in capital flows.

Source: World Bank, IMF, RBI

Further, when assessed through the lens of the Net International Investment Position (NIIP), India’s external balance sheet shows a marked strengthening—with the NIIP deficit narrowing steadily from 16% of GDP in 2016 to 9.4% in 2024. This steady consolidation contrasts sharply with advanced economies such as the United States, whose NIIP deficit has deteriorated to an alarming 91% of GDP, or France, which continues to run a debtor position of 22%. Even within the emerging market cohort, China’s moderate creditor stance (around 18% of GDP) and Japan’s exceptionally strong surplus (87% of GDP) are often highlighted, but what is overlooked is the pace and resilience of India’s external balance sheet improvement despite being a capital-importing economy. When benchmarked against peers with stronger ratings, India’s improving NIIP dynamics suggest that the current BBB assessment understates the country’s external strength, especially given its low external-debt-to-GDP ratio and robust reserve cover.

Over the last decade, the current account deficit has generally remained in the ~1–2% of GDP range, supported by a large services surplus and the world’s largest remittance inflows (~USD 120–130 billion per year). In adverse terms-of-trade years, these non-debt-creating flows finance a substantial share of external needs, stabilizing the balance-of-payments.

This stands in sharp contrast to countries like South Africa and Romania, which run larger deficits (3–6% of GDP), reliant on volatile short-term flows. Importantly, India’s external sector has been crisis-tested: during the 2013 taper tantrum, the COVID-19 shock, and the 2022–23 Fed rate hike cycle, India sustained growth, contained inflation, avoided severe reserve depletion, and managed currency volatility far better than peers. Anchored by a credible monetary policy framework, a flexible exchange rate regime, and prudent RBI interventions, India’s external resilience significantly lowers forex risks for internationally exposed businesses and positions the sovereign more strongly than many BBB and even some A-rated peers.

• Another powerful validation of India’s external strength is its inclusion in major global bond indices such as JP Morgan’s GBI-EM and Bloomberg’s EM Local Currency Index. This milestone, achieved after years of cautious resistance, represents both investor confidence and policy maturity. For years, India deliberately kept foreign participation limited due to concerns over capital controls, tax complexities, and the risk of volatile flows, choosing instead to rely on its deep domestic investor base. Reforms such as the Fully Accessible Route (FAR), settlement streamlining, and clearer taxation rules removed these barriers and enabled index eligibility. As a result, India will now attract stable, benchmark-driven inflows from global institutional investors, improving liquidity, lowering sovereign borrowing costs, and further diversifying its external financing sources. For a BBB-rated sovereign, this endorsement highlights that global markets already recognize India’s resilience and depth, even if rating agencies have yet to fully reflect it.
• Bond Market Stability and Capital Inflows—The Untold Pillars of External Resilience: Beyond conventional external buffer metrics, market-based indicators provide a more nuanced validation of India’s external strength. Over FY20–FY25, India’s 10-year government bond yields remained remarkably stable, with a standard deviation of just 0.47, despite CPI inflation exhibiting more than double the volatility at 1.14. Even during global commodity shocks and pandemic-driven price surges, yields moved only modestly, highlighting the credibility of India’s monetary-fiscal framework. In contrast, U.S. 10-year yields were far more volatile (std. dev. 1.44) and displayed a stronger correlation with inflation (0.51) than India’s 0.12, underscoring the relative insulation of India’s borrowing costs from price volatility. This stability in the yields reflects deepening investor trust in India’s debt sustainability and market depth.
• Complementing this financial stability, India mobilised cumulative net FDI inflows of USD 435.9 billion during 2015–2024, second only to Spain among BBB and A-rated peers. Importantly, these inflows were sustained even through global uncertainty, highlighting the structural attractiveness of India’s growth story. Alongside this, cumulative FPI inflows of USD 270.31 billion (FY01 to FY24) underscore the growing depth and integration of India’s capital markets, making them a preferred destination for global investors. Together, the combination of bond market stability, long-term FDI commitments, and consistent portfolio inflows reinforces India’s external resilience and signals fundamentals that are materially stronger than its current BBB rating conveys.

Banking System Stability

India’s banking sector has undergone a structural transformation since 2018, emerging stronger and more resilient. Gross NPAs have declined sharply from 9.6% to 2.3%, supported by a provisioning coverage ratio above 75%, substantially reducing hidden stress. Capital adequacy ratios of 14–17% for most large banks comfortably exceed the Basel III minimum of 10.5%, placing India well above regulatory thresholds. Together, these improvements underscore the banking sector’s role as a stable anchor for India’s broader credit profile.

• This turnaround has been anchored by structural reforms—most notably the Insolvency and Bankruptcy Code (IBC), proactive provisioning cycles, and vigilant RBI oversight. These measures have repositioned Indian banks as shock absorbers rather than sources of systemic stress. Supported by strong digital financial inclusion, robust profitability, and adequate liquidity buffers, India’s banking system now ranks among the more resilient and stable within the emerging market universe. A healthier and better-capitalized banking sector not only reduces the risk of sovereign backstopping but also ensures reliable credit intermediation during episodes of global volatility—an underlying strength not fully captured in India’s current BBB sovereign rating.
• Further, on the funding side, India’s banking system is anchored in a deep and stable retail deposit base, insulating it from the wholesale funding volatility.
• In addition, the domestic bond market, now the third largest in Asia, offers an alternative channel of resource mobilization for banks and corporates, further enhancing systemic resilience.
• Retail participation in India’s corporate bond market, though historically negligible, is now showing a structural uptrend. SEBI’s reduction of the minimum investment size from ₹1 lakh to ₹10,000, along with exchange platforms and fintech marketplaces, has widened retail access. As a result, retail holdings in high-yield bonds (AA and below) have risen from 3.8% in FY24 to 5.8% in Q1 FY26, a 50% increase in just two years. Bond marketplaces project this share could reach 10–12% within the next two years. Unlike foreign institutional investors, retail investors typically hold bonds to maturity, providing a stable and sticky funding base. This deepening of domestic savings into the bond market enhances systemic resilience and positions India more favourably.

Institutional & Policy Credibility

The RBI’s inflation-targeting framework (4% ±2% CPI) has anchored monetary stability even through volatile global rate cycles. India’s policy responses, from the 2008 Global Financial Crisis to the COVID-19 pandemic, have been timely and pragmatic, avoiding the sharp currency collapses, banking stress, and fiscal slippages witnessed in other countries such as Mexico, Russia, and Japan.

Reforms such as the Goods and Services Tax (GST), the Insolvency and Bankruptcy Code (IBC), corporate tax rationalisation, and the expansion of digital public infrastructure (UPI, Aadhaar, ONDC) demonstrate reform persistence despite regional political compulsions. Currently, India’s UPI contributes to 85% of India’s digital payments and nearly 50% globally (Source: Press Note Details: Press Information Bureau). Strong institutions, a credible monetary policy framework, and predictable policymaking underpin a stable business environment. This credibility differentiates India from many BBB-rated peers and provides long-term investors with confidence in policy continuity, even during global shocks.

The confidence reflected in India’s bond index inclusion is also a testament to institutional credibility. It was made possible by reforms such as the Fully Accessible Route (FAR), improvements in market infrastructure, and transparent policymaking that aligned India with global best practices. The acceptance by JP Morgan and Bloomberg thus reflects not just India’s market depth, but also the credibility of its regulatory and policy institutions in gradually liberalizing the capital account while safeguarding stability.

So, Is the BBB Rating Enough?

When assessed across growth, debt sustainability, external resilience, banking stability, and institutional credibility, India’s fundamentals not only compare favourably but, in several respects, outperform higher-rated economies. The current BBB rating, therefore, materially understates India’s true credit strength, which already aligns more closely with higher-rated peers across multiple dimensions.

For corporates, this sovereign momentum represents a strategic opportunity rather than an automatic uplift. By aligning their balance sheets and governance standards with India’s stronger macro backdrop, companies can secure lower funding costs, attract a deeper pool of global investors, and gain credibility in international markets. A sovereign upgrade would further catalyse corporate access to capital, but even in its anticipation, businesses that demonstrate financial discipline and transparency are best placed to convert India’s improving credit narrative into a competitive edge, both domestically and globally.

At MPFASL, we go beyond conventional advisory to unlock a company’s true credit potential. Our role is not merely preparing documents for a rating exercise, but to strategically align a company’s credit story with India’s evolving macro strengths and global investor expectations. By meticulously validating data, removing discrepancies, and identifying Unique Rating Propositions (URPs), we ensure that our clients’ inherent strengths are fully recognized by rating agencies. Through internal rating analysis, proactive engagement with CRAs, and continuous monitoring, we transform ratings from being a constraint into an enabler of growth. In doing so, we bridge the gap between potential and perception, helping businesses secure the ratings they truly deserve, ratings that reflect not only their financials but also their resilience, strategy, and long-term competitiveness.

Complementing this, we have also been undertaking sectoral and policy assessments to provide deeper insights into sectoral and policy research. Our recent deep-dive studies on steel and scrap dynamics, microfinance sector transitions, securitisation policies, hospitality resilience, and India’s sovereign rating debate reflect our commitment to delivering holistic insights. These analytical perspectives not only strengthen our client engagements but also contribute to shaping industry-wide discussions on credit, resilience, and growth.