Fitch affirms India rating on robust growth, flags youth job risks to fiscal profile

Credit ratings agency Fitch affirmed India's sovereign rating at BBB- on Tuesday, recognizing robust growth while expressing concerns over fiscal metrics. Fitch warned that these metrics could be pressured by rising worries about youth unemployment. The agency has maintained this rating since 2006, with Moody's holding its Baa3 rating since June 2020, and S&P Global Ratings upgrading India to BBB last year.

India's economy is projected to grow at 6.4% in real terms in the financial year 2027, slightly below the three-year average growth rate but still significantly higher than the median in its credit rating category. The economy expanded by 7.8% year-on-year in the January-March quarter, with retail inflation in June sitting at 4.38%, slightly above the central bank's 4% medium-term target.

Despite concerns from the US-Iran conflict, which affects India as a major net energy importer, Fitch does not anticipate a lasting threat to growth prospects. The agency noted that while inflation appears to be stable and fiscal policy mitigates the impact of higher energy costs, the Reserve Bank of India is expected to raise rates by 25 basis points later in the year to counteract the second-round effects of the oil shock and El Nino risks.

High deficits and slow improvement in structural indicators, including governance and GDP per capita, pose challenges to India's rating. Government debt stands at 84.4% of GDP in FY26, significantly above the BBB median. Fitch projects this debt to gradually decline to around 79% by FY31, contingent on medium-term nominal GDP growth of 10.5%.

The rating reflects the impact of an unprecedented energy supply disruption, the largest in history, which has led to substantial capital outflows and a steep decline in the value of the rupee. Fitch highlighted that India's external finances remain robust, with foreign exchange reserves expected to reach $733bn by the end of fiscal year 2027.

The firm also suggested that subsequent electoral success for Prime Minister Narendra Modi's Bharatiya Janata Party (BJP) could bolster policy implementation. However, recent youth-led protests over leaked medical exam results may indicate growing concerns about employment opportunities, potentially leading to increased fiscal spending pressures in the future.