India's Credit Rating Upgrades 2025: S&P, DBRS and R&I Analysis from Economic Survey 2025-26
In a historic development that underscores India's improved macroeconomic standing on the global stage, the country received sovereign credit rating upgrades from three international agencies in 2025. The Economic Survey 2025-26 highlights these upgrades as a validation of India's fiscal discipline, strong growth momentum, and policy credibility. For UPSC aspirants and students of Indian economy, understanding the significance of these rating changes is essential, as they impact everything from government borrowing costs to foreign investment flows.
Three Credit Rating Upgrades in 2025: A Historic Achievement
According to the Economic Survey 2025-26, India received credit rating upgrades from three different agencies during 2025. The sequence began with Morningstar DBRS in May 2025, followed by Standard & Poor's (S&P) in August 2025, and Rating and Investment Information Inc. (R&I) of Japan in September 2025.
Among these, the S&P upgrade stands out as particularly significant. S&P upgraded India's sovereign rating from BBB- to BBB, marking India's first credit rating upgrade from a major global rating agency in nearly two decades. The last time India received an upgrade from one of the three major agencies (S&P, Moody's, or Fitch) was in 2007, when the economy was riding the pre-global financial crisis boom.
This long drought in rating upgrades had been a source of frustration for policymakers and economists who argued that India's rating did not adequately reflect its improved economic fundamentals. The 2025 upgrades, therefore, represent not just an incremental improvement but a fundamental reassessment of India's creditworthiness by the global financial community.
What Led to the Credit Rating Upgrades? Economic Survey 2025-26 Analysis
The Economic Survey 2025-26 attributes these upgrades to a combination of factors that have strengthened India's macroeconomic profile over the past few years.
Fiscal Consolidation: Perhaps the most important factor has been the government's commitment to fiscal discipline. The Union Government achieved a fiscal deficit of 4.8 per cent of GDP in FY25, against the budgeted 4.9 per cent. More importantly, the government announced a target of 4.4 per cent for FY26, fulfilling the promise made in 2021 to reduce the Union fiscal deficit by more than half from the pandemic peak of 9.2 per cent in FY21.
This fiscal consolidation has been achieved without compromising on growth-enhancing capital expenditure. The quality of government spending has improved, with a greater proportion now directed towards infrastructure and productive investments rather than revenue expenditure.
Strong Growth Performance: India has maintained its position as the fastest-growing major economy for four consecutive years. With real GDP growth of 7.4 per cent in FY26 and potential growth upgraded to 7.0 per cent, the economy has demonstrated remarkable resilience despite global headwinds.
Inflation Management: Headline CPI inflation declined to 1.7 per cent during April-December FY26, the lowest in the current CPI series. This effective inflation management has enhanced confidence in India's macroeconomic stability.
External Sector Stability: Despite running a current account deficit, India has maintained adequate foreign exchange reserves and external liabilities remain at manageable levels. The country's external debt is approximately 18-20 per cent of GDP, which is comfortable by international standards.
S&P Upgrade: From BBB- to BBB – What It Means
The S&P upgrade from BBB- to BBB deserves closer examination. In the credit rating hierarchy, BBB- represents the lowest investment grade rating, while BBB is one notch above. While this may seem like a small change, its implications are substantial.
A BBB- rating places a country at the edge of investment grade and speculative grade (commonly called junk status). Many institutional investors, particularly pension funds and insurance companies, have mandates that restrict or prohibit investments in securities that are just one notch above junk. The upgrade to BBB provides a cushion and reduces the perceived risk of India falling into junk territory.
Moreover, credit rating upgrades typically lead to lower borrowing costs. When a country's rating improves, investors demand a lower risk premium to hold its bonds. This reduces the interest rate that the government must pay on new borrowings, saving taxpayer money and creating fiscal space for developmental expenditure.
The Economic Survey 2025-26 notes that markets have acknowledged and rewarded the government's commitment to fiscal discipline through lower sovereign bond yields. The spread over U.S. bonds has declined by more than half, indicating improved investor confidence in Indian government securities.
The Long Wait: Why Did Rating Upgrades Take So Long?
India's previous rating upgrade from a major agency came in 2007, nearly two decades before the 2025 upgrade. During this long interval, India's economy grew substantially, poverty declined, infrastructure improved, and the country became the world's fifth-largest economy. Yet, rating agencies maintained their cautious stance.
Several factors explained this hesitancy. India's fiscal metrics, particularly the general government debt-to-GDP ratio, remained elevated compared to peer economies. The twin balance sheet problem (stressed bank assets and overleveraged corporate sector) that emerged after the infrastructure boom of 2007-12 took years to resolve. Structural reforms, while significant, were often implemented incrementally rather than dramatically.
Rating agencies also cited concerns about governance, policy uncertainty, and implementation challenges. The subjective nature of these assessments meant that even as hard data improved, India's rating remained unchanged.
The 2025 upgrades suggest that a tipping point has been reached. The cumulative impact of reforms since 2014, including GST implementation, Insolvency and Bankruptcy Code, financial sector cleanup, and infrastructure push, has finally translated into a reassessment of India's credit profile.
Comparison with Peer Economies: India vs Indonesia
The Economic Survey 2025-26 makes an interesting comparison between India and Indonesia, both of which now have a BBB rating from S&P. Despite having the same credit rating, India's 10-year bond yield is 6.7 per cent, while Indonesia's is 6.3 per cent.
This yield differential suggests that factors beyond the sovereign rating are at play. The survey points to concerns about state-level fiscal health in India. While the Union Government has achieved remarkable fiscal consolidation, several states have increased revenue deficits and unconditional cash transfers. Investors, who now assess general-government finances rather than just Union government finances, may be factoring in these state-level fiscal risks.
This comparison highlights that a credit rating upgrade is a necessary but not sufficient condition for lower borrowing costs. The quality of fiscal management at all levels of government matters for India's cost of capital.
Impact on Foreign Investment: FDI and FPI Implications
Credit rating upgrades typically enhance a country's attractiveness as an investment destination. For Foreign Direct Investment (FDI), a better rating signals a more stable macroeconomic environment, reducing the perceived risk for long-term investments. According to the Economic Survey 2025-26, FDI inflows grew by 17.9 per cent year-on-year to reach $55.6 billion.
For Foreign Portfolio Investment (FPI), the impact is more direct. Many global funds have investment mandates linked to credit ratings. An upgrade can trigger automatic rebalancing of portfolios, bringing additional foreign capital into Indian equity and debt markets. The inclusion of Indian government bonds in global bond indices has been facilitated by India's improved credit profile.
However, the survey also notes a paradox. Despite India's strongest macroeconomic performance in decades, the rupee underperformed in 2025. This suggests that credit ratings, while important, are only one factor influencing capital flows and currency movements. Geopolitical considerations, global risk appetite, and trade dynamics also play significant roles.
Rating Agencies and Their Methodologies: A Brief Overview
For UPSC aspirants, understanding the major rating agencies and their methodologies is important.
Standard & Poor's (S&P): One of the three major global rating agencies (along with Moody's and Fitch), S&P rates sovereigns on a scale from AAA (highest) to D (default). Investment grade ratings range from AAA to BBB-. S&P's methodology considers economic structure, growth prospects, fiscal flexibility, external liquidity, and institutional effectiveness.
Morningstar DBRS: Originally a Canadian rating agency, DBRS merged with Morningstar in 2019. It is particularly influential in European markets and has been expanding its coverage of emerging market sovereigns.
R&I (Rating and Investment Information Inc.): A Japanese rating agency with significant influence in Asian markets. R&I's upgrade reflects India's improved standing in Asian financial markets.
Each agency has its own methodology, but common factors include fiscal sustainability, economic growth, external position, monetary flexibility, and institutional quality. The convergence of upgrades from multiple agencies suggests that India's improvement on these parameters has been broad-based and recognized across different analytical frameworks.
Implications for Government Borrowing Programme
The Economic Survey 2025-26 highlights the practical benefits of rating upgrades for the government's borrowing programme. Lower yields on government securities translate directly into fiscal savings. When the government borrows at lower interest rates, a smaller portion of revenue must be allocated to interest payments, freeing up resources for capital expenditure and social programmes.
The survey notes that sovereign bond yields have declined, with the 10-year benchmark yield falling significantly. This has reduced the cost of new borrowings and refinancing of maturing debt. Over time, as old high-interest debt is replaced with new low-interest debt, the average cost of the government's debt portfolio declines.
Additionally, lower government borrowing costs have spillover effects on the broader economy. Bank lending rates, corporate bond yields, and other interest rates in the economy tend to follow government bond yields. This creates a more favourable environment for private investment and consumption.
Challenges Ahead: Maintaining the Upgrade Trajectory
While the 2025 upgrades are a significant achievement, the Economic Survey 2025-26 cautions against complacency. Maintaining and further improving credit ratings requires continued fiscal discipline, structural reforms, and prudent macroeconomic management.
The survey identifies several challenges. First, state-level fiscal health needs attention. Rising revenue deficits and unconditional cash transfers in several states are concerning. Since investors assess general-government finances, weak fiscal discipline at the state level can undermine the benefits of Union government consolidation.
Second, global uncertainties remain elevated. The US tariff regime, geopolitical tensions, and potential financial market volatility could create headwinds. India must continue to build buffers against external shocks.
Third, structural reforms must continue. The rating agencies' improved assessment of India reflects cumulative reforms over many years. Maintaining reform momentum is essential for further upgrades and for realising the full benefits of the current upgrades.
UPSC Relevance: Credit Ratings and Economic Survey 2025-26
Credit rating upgrades are highly relevant for UPSC examinations. Questions can be expected on:
- The significance of sovereign credit ratings and their impact on borrowing costs
- Factors considered by rating agencies in assessing sovereign creditworthiness
- The relationship between fiscal consolidation and credit ratings
- Comparison of India's rating with peer economies
- The impact of state-level fiscal health on sovereign credit assessment
Practice MCQs on India Credit Rating - Economic Survey 2025-26
Q1. According to Economic Survey 2025-26, which rating agency upgraded India's sovereign rating first in 2025?
(a) S&P
(b) Moody's
(c) Morningstar DBRS
(d) Fitch
Answer: (c) Morningstar DBRS (in May 2025)
Q2. S&P upgraded India's sovereign rating from:
(a) BB+ to BBB-
(b) BBB- to BBB
(c) BBB to BBB+
(d) BBB+ to A-
Answer: (b) BBB- to BBB
Q3. According to Economic Survey 2025-26, India's previous credit rating upgrade from a major agency was in:
(a) 2007
(b) 2010
(c) 2014
(d) 2017
Answer: (a) 2007 (nearly two decades before 2025)
Q4. Which of the following is NOT a factor considered by rating agencies in sovereign credit assessment?
(a) Fiscal sustainability
(b) Population growth rate
(c) External liquidity
(d) Institutional effectiveness
Answer: (b) Population growth rate
Q5. According to Economic Survey 2025-26, despite having the same BBB rating, India's bond yield is higher than which country?
(a) Brazil
(b) South Africa
(c) Indonesia
(d) Turkey
Answer: (c) Indonesia (India 6.7% vs Indonesia 6.3%)
Conclusion
The credit rating upgrades of 2025, as highlighted in the Economic Survey 2025-26, represent a watershed moment for India's economic standing in the global financial community. The S&P upgrade from BBB- to BBB, in particular, ends nearly two decades of rating stagnation and validates the cumulative impact of reforms and fiscal discipline. However, these upgrades are not an endpoint but a foundation for further improvement. Continued fiscal consolidation, attention to state-level finances, and sustained structural reforms will be essential to maintain this positive trajectory and eventually achieve the higher investment grade ratings that India's economic size and potential deserve.