S&P Global Ratings on Tuesday affirmed India’s sovereign rating at the lowest investment grade of ‘BBB-’ for the 14th year in a row with a stable outlook, and said that the country’s strong external settings will act as a buffer against financial strains despite elevated government funding needs over the next 24 months.

The sovereign credit ratings on India reflect the economy’s above-average long-term real GDP growth, sound external profile, and evolving monetary settings, it said.

“India's democratic institutions promote policy stability and compromise, and also underpin the ratings. These strengths are balanced against vulnerabilities stemming from the country’s low per capita income and weak fiscal settings, including consistently elevated general government deficits and indebtedness,” S&P Global Ratings said in a statement.

The agency has forecast economic activity in India to begin to normalise throughout the remainder of fiscal 2022, resulting in real GDP growth of about 9.5 per cent.

A significant proportion of this rebound will be due to the very weak base in the prior fiscal year, when the economy contracted by a record 7.3 per cent. India's fiscal settings are weak, and deficits will remain elevated over the coming years even as the government undertakes some consolidation.

The country’s strong external settings help buffer the risks associated with the government’s high deficits and debt stock, S&P said, affirming ‘BBB-’ long-term and ‘A-3’ short-term unsolicited foreign and local currency sovereign ratings on India.

“The stable outlook reflects our expectation that India’s economy will recover following the resolution of the Covid-19 pandemic, and that the country’s strong external settings will act as a buffer against financial strains despite elevated government funding needs over the next 24 months,” it said.

India’s democratic institutions promote policy stability and compromise, and also underpin the ratings. These strengths are balanced against vulnerabilities stemming from the country’s low per capita income and weak fiscal settings, including consistently elevated general government deficits and indebtedness.