International rating agency Moody’s retained its Baa3 (BBB-) sovereign credit rating for India with a stable outlook, but warned that the ongoing conflict in the Middle East would moderate real GDP growth to 6% in FY27 and raise inflation risks.
The stable outlook incorporates India’s gradually improving fiscal metrics since emerging from the pandemic and resilient growth prospects compared with peers, the ratings agency said, cautioning that fiscal accommodation in the context of the uncertain global macroeconomic outlook, including revenue-eroding measures, could impede progress towards debt reduction and exacerbate already weak debt affordability.
Moody’s also predicted an increase in inflation this fiscal year, noting that further disruptions due to the conflict, particularly in the energy sector, could exacerbate the crisis through near-term household shortages, higher fuel and transport costs, and spillovers into food inflation through India’s reliance on imported fertilizers. The agency projects inflation will double to 4.8% in FY27 from 2.4% in FY26. While inflation remains contained for now, geopolitical risks have tilted the outlook to the upside, the ratings agency said.
Moody’s said it expected private investment to pick up gradually, bolstered by the government’s infrastructure push that began in 2023. This growth is further supported by strategic efforts to diversify trade and mitigate the volatility caused by US tariff actions over the past year.
Trade flows
On the trade front, exports and imports each grew by 6.9% year-on-year in calendar year 2025. The steady pace of export growth compared with 2024 (up 6.8%) reflects India’s gradual pivot toward greater export orientation under policies aimed at enhancing economic competitiveness, while strong import growth continues to support input requirements of the expanding manufacturing sector and accommodate rising domestic consumption, the agency said.
Moody’s also highlighted risks to current account deficit and remittance inflows, noting that the Middle East accounts for 37% of inward remittances. Any disruption to employment in the region could affect domestic demand and external financing buffers.
It said while India’s goods and services exports would remain broadly stable, goods imports will expand on the back of higher global commodity prices, depending on the duration of ongoing conflict in the Middle East, widening India’s current account deficit.
“We also expect India to face higher import costs as it secures alternative and potentially more expensive supplies of fertilizers and gas. Trade disruptions affecting the Middle East, a key market for India’s agricultural exports, will also dampen external demand, further contributing to a widening in the current account deficit,” the Moody’s report said.
“Remittance inflows form another vulnerability, as the Middle East accounts for about 40% of total flows of inward workers’ remittances. A sustained conflict that weakens expatriate employment in oil services, construction, retail, and hospitality would thus weigh on consumption, rural demand, and India’s external financing buffer at a time of elevated energy import needs,” it added.
Rupee depreciation
On the rupee’s depreciation, Moody’s said while oil prices and global financial conditions have historically been the main drivers of foreign exchange stress for India, reserves can only moderate volatility rather than prevent depreciation under a prolonged shock, making the duration of the conflict the key determinant of external sector stability.
On the fiscal front, debt burden remains elevated, with general government debt projected to stay above 80% of GDP in the medium-term. As a result, fiscal consolidation is expected to remain gradual, Moody’s said, with the Centre targeting a deficit of 4.3% in FY27, only a marginal improvement from 4.4% in FY26.
The agency said upward pressure on the India rating would develop if there was a material improvement in the affordability of India’s high debt burden to levels more consistent with higher-rated peers. This would likely entail fiscal measures that durably raise revenue, narrow the fiscal deficit and contribute to a more marked decline in debt.
The effective implementation of structural reforms that result in a significant pickup in private sector investment, faster growth in GDP per capita and broader economic diversification, for instance in higher value-added manufacturing or digital services, would support stronger assessments of policy effectiveness and the credit profile, it said.
It cautioned, however, that downward pressure on the rating would stem from durably weaker growth than currently projected or a reversal in recent gains from fiscal consolidation that would contribute to materially higher debt and a significant worsening in debt affordability. In addition, a resurgence of financial sector stress that is unlikely to be addressed promptly and effectively would also put downward pressure on the rating, Moody’s said.
