S&P Global's India Rating Upgrade May Lower Funding Costs For India Inc

The ratings upgrade by S&P Global could help lower the cost of funding for the Indian economy and local corporates borrowing from abroad, while also triggering positive macro externalities.

S&P Global Ratings on Thursday upgraded India’s sovereign rating to BBB from BBB-, with a stable outlook. The rating was upgraded, citing economic resilience and sustained fiscal consolidation.

A rating upgrade into a higher investment-grade category of BBB can open the door for new pools of global funds’ capital, said Madhavi Arora, lead economist at Emkay. All of this will lower India’s risk premia and consequently, lower the cost of funding across macro agents’ curves, including corporates —especially those borrowing abroad, Arora said.

The benchmark lending rate has already eased amidst looser monetary policy, while international borrowing costs have been turning favourable, Dinesh Kumar Khara, ex-chairperson of State Bank of India, said. This should start to show up in the operating profits of corporates in the days to come. This, along with the rate cut, is expected to help boost foreign investments, Khara explained.

Overall reduced cost of capital for the economy would help India finance its fiscal and current account deficit and could trigger positive externalities. This is relevant as there is a fair risk of the current account deficit crossing 1% of GDP in FY26 amid downside risk to exports of goods (and services), while net FPI flows so far this fiscal have been tracking at about -$2.1 billion, with debt outflows of about $2.3 billion, said Arora. Given the cost of interest servicing, the gradual improvement in sovereign ratings could free up resources for economic development, Khara said.

Despite possibly better FPI debt flows, demand from domestic agents for government bonds stays unconvincing, especially at the longer end, Madhavi Arora said.

While we believe the rate easing cycle may still have further room to run, markets are not fully pricing the same, thus further aiding G-sec curve steepness.

The yield on the benchmark 10-year bond may range from 6.35-6.50%.