In August, Fitch Ratings India’s long-term sovereign risk rating at ‘BBB-’ with a stable outlook—a rating level India has held for 20 years. This is a notch lower than the ‘BBB’ and ‘Baa3’ ratings assigned by S&P Global and , respectively.
On the ratings scale, India is at the minimum investment grade, any lower and it would fall into the speculative category. The other two rating agencies place India a notch above investment grade.
India’s prolonged stay at the minimum investment grade rating level has come in for much discussion. An often-heard view is that the country is rated harshly by global credit rating agencies given its size, economic growth and political stability. What methodology do these rating agencies follow for sovereign ratings? Does that methodology faithfully capture what it sets out to capture? Where does India fare well and where does it lag? Are ratings the start and end point of this conversation, or is there more?
Servicing debt
A sovereign rating is the opinion of a rating agency on a nation’s ability and willingness to service its debt obligations. Ratings are represented by symbols ranging from D (default grade, worst rating) to AAA (highest rating). India’s BBB lies somewhere in the middle. Plus (+) and minus (-) symbols are added to indicate tiers within each rating category.
A sovereign’s ability to pay is gauged by assessing if its revenue generating capacity is enough to service its debt. In order to make this evaluation, rating agencies analyse metrics on growth, per capita , debt, fiscal balance, external vulnerability, inflation and monetary management. Willingness to repay is assessed on the basis of qualitative factors such as political stability, prevalence of rule of law, civil society activity, and the credibility and independence of institutions—all fairly subjective in nature.
, the largest of the big three international rating agencies, bases its sovereign ratings on five assessment pillars: institutional, economic, external, fiscal and monetary factors. Each is assigned a value on a scale of 1 to 6, with 6 being the weakest. These are then combined and adjusted to generate a final rating. Other rating agencies follow a broadly similar methodology.
A BBB rating, which India has, implies the country has adequate capacity to repay debt, but faces moderate economic vulnerability. In effect, the BBB group includes countries that are stable enough to avoid default, yet are sensitive to major shocks. As of end-July, there were 25 countries in S&P’s BBB universe.
The group is fairly diverse. It includes Asian emerging market peers such as Thailand, Philippines, Indonesia; some emerging European economies, including Hungary, Bulgaria and Serbia; Mexico, Uruguay and Paraguay from the Americas, and Morocco from North Africa. The list also includes two distinctly richer countries: Italy and Sharjah, one of the seven emirates that constitute the UAE. The GDP per capita of this set of 25 countries ranges from $2,810 (India) to $46,710 (British Virgin Islands).
Mix and match
There is no unique combination of attributes to achieve a BBB (or any other) rating. Countries within the same rating category have distinct economic, political, socio-institutional and geopolitical profiles. Consider India and Italy, which are both in the BBB group, despite their very different economic structures (strictly speaking, S&P rates Italy as BBB+, India as BBB; Fitch rates Italy as BBB+ and India as BBB-).
Over the last three years, India has grown at 6–7% a year, while Italy grew at less than 1%. India runs a current account deficit, while Italy has a surplus. Italy’s per capita GDP is 17 times India’s. Yet, Italy is assessed to be weaker on the external front because of its huge government debt (133% of GDP versus 80% for India), and large external creditor position to the rest of the world. India’s low external debt partially makes up for other weaknesses in its economic profile.
Differences like this create distinct economic vulnerabilities across the group. For example, Sharjah and India, both BBB-, are differently impacted by the US-Iran war.
Sharjah is directly affected by air strikes on UAE, and will probably face a growth slowdown from the war-induced drop in consumer and investor sentiment. India, on the other hand, faces gas shortages and higher energy import bills. Sharjah’s pegged exchange rate reduces monetary flexibility, while India’s central bank remains in control of monetary policy even though the Indian rupee has plummeted. Sharjah’s centralized power structure leads to non-transparent decision making; India is a democracy with a federal structure. That explains why Sharjah scores worse than India on S&P’s monetary and institutional assessments. Consequently, in spite of having a per capita GDP that is 10x of India, Sharjah and India have identical sovereign ratings.
The takeaway is that a sovereign credit rating is not simply a measure of how strong or rich an economy is. Rather, it is a composite measure of several elements that affect a country’s ability to service its debt obligations. Therefore, instead of treating a sovereign rating as a badge of national prestige, it is more useful to engage with it along five key dimensions.
Per capita dynamics
One, real per capita GDP (in US dollars) is a vital input to the rating process. Countries with higher per capita GDP tend to cluster in higher rating categories. The connection is straightforward: higher per capita income reflects a higher standard of living, which means a government has a large base to draw tax revenues from. This, in turn, makes it more credit-worthy.
This reliance on per capita GDP in dollars is often criticized by Indian experts because per capita GDP in purchasing power parity (PPP) terms better reflects the comparatively lower prices of goods and services in developing countries. Further, given the steady depreciation of the rupee, converting nominal GDP to dollars at market exchange rates understates the actual purchasing power of residents. That’s why rating agencies attempt to strike a balance between using nominal and PPP values: dollar GDP data is used to assess creditworthiness, while PPP data measures domestic economic progress. In addition, GDP is analysed from several angles: growth, volatility, and concentration. Sustained, strong growth is seen as a clear positive.
Two, low per capita income is not a bar to achieving an investment grade rating, as pointed out in an August 2026 S&P Global research note titled ‘Do Low Incomes Block Sovereigns from Attaining Investment-Grade Ratings?’ When India first attained investment grade (BBB-) in 2017, its per capita GDP was $2,614 (adjusted to 2026 dollars)—much lower than the $38,749 median for countries in that category. “India’s per capita income remains the lowest among investment-grade sovereigns, despite many years of rapid GDP growth… India’s strong external profile, record of above-average GDP growth, and good monetary policy flexibility balance its fiscal inflexibility, high debt burden, and low per capita GDP,” says the note.
At the same time, all nations with speculative-grade ratings are not poor. Brazil (rated BB, GDP per capita of $12,335) and Vietnam (rated BB+, GDP per capita of $5,100) are examples of emerging market peers that are richer than India but have not yet made it to investment grade.
Focus on Fundamentals
Three, overall, sovereign ratings change slowly. Downgrades can be swift, but only when there is a crisis with a severe impact on creditworthiness. For instance, Thailand dropped from A to BBB after the Asian financial crisis in 1997. Italy suffered a similar downgrade in 2011-12 during the European debt crisis. But upgrades come on the back of many years of proven, sustained improvement across economic and institutional parameters.
Between 2005 and 2010, China was upgraded massively, moving from the BBB group to the AA group, because it had implemented banking reforms, built massive reserves, diversified export markets and delivered average growth of over 10% in the preceding two decades. India can possibly achieve the same if it continues to deliver strong growth.
Four, fiscal performance is a core driver of sovereign creditworthiness. Fiscal strength is usually assessed along two broad dimensions: debt burden and ability to service it via revenues. The first parameter analyses trends in general government debt by issuer (centre, states, municipalities), type (external or domestic), tenure (short or long term), and measure (value or percent to GDP). The second examines debt affordability by comparing debt service outflows to revenues or GDP. The lower the debt burden, and the higher the revenues available to service the debt, the more the fiscal flexibility.
To be sure, staying on a fiscally prudent path is necessary, and India’s fiscal discipline has earned much praise among rating agencies. But a comparison of tax revenue to government debt shows the stark divide between emerging nations in Asia and Europe. Within the BBB group, the tax-to-GDP ratio ranges from 27-42% for European nations; but 4-20% for Asian sovereigns.
Even with relatively lower public debt, countries such as India, Indonesia and Mexico are fiscally vulnerable for two reasons: low tax collections and high ratio of interest payments to GDP. The former makes it harder to keep debt down and/or repay outstanding debt, and the latter reduces public funds available for investment and welfare spending. But this is not an insurmountable problem.
As a recent pointed out, improving tax compliance by simplifying GST, improving state fiscal discipline by deepening the market for state loans, and committing to meet the goals of the new debt-anchored fiscal framework are some ways in which India can strengthen its fiscal position.
Rating review
Five, there is some evidence that sovereign ratings are biased against developing countries. The biases creep in at multiple levels. Some of the assessed parameters (say, governance) rely on qualitative indices that are highly subjective. But studies show that even measurable parameters are applied and interpreted differently for developing and developed countries.
For instance, the level of forex reserves is seen as being more important for developing countries, according to a 2025 UNCTAD policy review titled ‘Credit Rating Agencies, Developing Countries and Bias’.
In the same way, a worsening of fiscal balance or inflation has a greater negative impact on developing economies. These differences in interpretation have real and significant consequences. An emerging economy may choose to hold excessively high reserves, or keep fiscal policy unnecessarily tight, just to avoid a ratings downgrade.
Emerging economies are increasingly questioning the ratings assigned by international agencies, often by setting up an equivalent domestic agency. India joined the club in 2024 with CareEdge Global Ratings, which offers a differentiated approach to sovereign ratings. Its methodology focuses on assessing sovereign credit strength by evaluating quantitative parameters such as indicators of capital formation, size and growth of the economy, debt sustainability, and external vulnerability. CareEdge currently rates India at BBB+ with a stable outlook, a notch or two higher than the big three. It is a sobering reality that in spite of CareEdge’s quantitative methodology, India’s sovereign rating saw only a small upgrade.
The good news for India is that global investors do not rely solely on ratings. They take many factors into account, which are often more important than the sovereign rating. Apart from passive bond funds, which are required to follow ratings norms of the index they are tracking, investors are more likely to track market indicators such as credit default swaps (CDS), which provide a real-time assessment of default risk.
At a session on sovereign ratings at the Raisina Dialogues conference earlier this year, experts opined that the pricing of India’s sovereign debt was more aligned to an A-minus rating, suggesting that markets place it in a higher rating category. Indeed, if a country has robust systems for collecting and sharing data, and manages its fiscal position prudently and transparently, investors are less likely to depend on sovereign ratings. A sovereign rating may be a starting point, but it is not the last word on a nation’s creditworthiness.
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