S&P Sees Limited Impact From U.S. Tariffs On Indian Economy, Raises Ratings

(RTTNews) - S&P Global Ratings upgraded India's sovereign ratings on Thursday citing a buoyant economic growth, enhanced monetary policy conditions and the government's fiscal consolidation commitment, while the higher tariffs from the U.S. administration is estimated to have only limited impact on the economy.

India's sovereign credit ratings were raised to 'BBB' from 'BBB-', with a 'stable' outlook on the ratings, the rating agency said. The stable outlook indicates the assessment that continued policy stability and high infrastructure investment will support India's long-term growth prospects. Moreover, cautious fiscal and monetary policy will help to moderate the elevated debt and interest burden of the government, which will support the rating over the next two years, S&P said.

The rating agency observed that India staged a remarkable comeback from the pandemic and remained among the best performing economies in the world.

India's economic growth over fiscal 2022 to fiscal 2024 averaged 8.8 percent, which was the highest in Asia-Pacific.

S&P expects solid consumer and public investment dynamics to boost India's real GDP growth to 6.5 percent in fiscal 2026 and to average 6.8 percent over the next three years.

Regarding the 50 percent tariff imposed by U.S. President Donald Trump, S&P said the effect on the Indian economy will be manageable as due to relatively less reliance on trade and about 60 percent of its GDP growth stems from domestic consumption.

S&P pointed out that India's exports to the U.S. constitute only 2 percent of GDP. A higher tariff is unlikely to pose a material drag on India's growth. The overall impact of tariff will be marginal and will not derail India's long-term growth prospects, S&P said.

The rating agency expects that the fiscal cost, if fully borne by the government, in the event India has to switch from importing Russian crude oil, will be modest given the narrow price differential between Russian crude and current international benchmarks.

Although weak fiscal settings had been the most vulnerable part of its sovereign ratings profile, S&P said the Indian government can depict a more concrete path to fiscal consolidation with economic recovery now well on track.

The rating agency projected general government deficit of 7.3 percent of GDP in fiscal 2026 to decline to 6.6 percent by fiscal 2029.

Further, S&P said the monetary policy reform to switch to inflation targeting has reaped dividends. Inflation at the lower bound of the target range together with a deep domestic capital market, reflect a more stable and supportive environment for monetary settings, said S&P.

Last week, the Reserve Bank of India left its key interest rate - the repo unchanged at 5.50 percent as the rift with the U.S. over trade tariffs escalated. The bank had reduced the rate by 100 basis points since February.

The RBI downgraded its inflation forecast for the current financial year to 3.1 percent from 3.7 percent projected in June, and retained the economic growth projection for the fiscal at 6.5 percent.

Official data released this week showed that retail inflation eased to an eight-year low of 1.55 percent in July as food inflation turned negative.