Fitch Ratings has reaffirmed India’s Long-Term Foreign-Currency Issuer Default Rating at ‘BBB-’ with a stable outlook, underscoring the country’s robust economic growth and solid external finances. The decision, announced on Monday, highlights India’s resilient economic trajectory, even as it faces potential challenges from proposed 50% US tariffs, which pose a moderate downside risk to its 6.5% GDP growth forecast for the fiscal year ending March 2026 (FY26).

India’s ‘BBB-’ rating, the lowest investment grade, comes on the heels of S&P Global Ratings upgrading India to ‘BBB’ on August 14, marking the first such upgrade in over 18 years. Earlier in May, Morningstar DBRS also raised India’s rating to ‘BBB’, citing structural reforms. Fitch’s affirmation reflects confidence in India’s economic fundamentals, with a projected GDP growth of 6.5% in FY26, unchanged from FY25 and significantly above the ‘BBB’ median of 2.5%. The agency estimates India’s medium-term growth potential at 6.4%, driven by strong public capital expenditure, a reviving private investment cycle, and favorable demographics.

Fitch emphasized the role of proposed Goods and Services Tax (GST) reforms in bolstering consumption to offset external risks, such as the US tariffs set to take effect on August 27. The Centre’s plan, submitted to the Group of Ministers on GST rate rationalization, proposes a simplified two-tier structure of 5% and 18% for ‘merit’ and ‘standard’ goods and services, respectively, alongside a 40% rate for a select few items, eliminating the current 12% and 28% slabs. However, Fitch noted these reforms could be “slightly revenue-negative,” potentially straining fiscal metrics.

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While India’s deregulation agenda and recent bilateral trade agreements are expected to support incremental growth, high trade barriers and political challenges in enacting land and labor reforms remain hurdles. Fitch acknowledged that some state governments might advance these reforms independently. The agency also highlighted India’s strong external finances, supported by robust foreign exchange reserves, a net external creditor position, and a low current account deficit.

Despite these strengths, Fitch flagged India’s fiscal metrics as a key weakness, with general government debt projected to rise to 81.5% of GDP in FY26 from 80.9% in FY25, driven by slower nominal GDP growth estimated at 9% for FY26, down from 9.8% in FY25 and 12% in FY24. The high interest-to-revenue ratio of 23.5%, compared to the ‘BBB’ median of 9%, further limits fiscal flexibility. Nevertheless, Fitch anticipates a modest deficit reduction to 4.4% of GDP in FY26, aligning with the government’s fiscal consolidation goals.

The stable outlook reflects India’s improving fiscal credibility and macro stability, which could gradually enhance structural metrics like GDP per capita. However, lagging governance indicators and high debt levels continue to constrain the rating, even as India remains a standout performer among its peers.

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