India's rating likely to be raised on the back of reduction in fiscal deficit

Mumbai: The reduction in the fiscal deficit estimate at the end of the current financial year and fiscal discipline will pave the way for India's rating upgrade in FY 2025-26. The high dividend of the Reserve Bank is considered a big relief on the fiscal front.

Deepak Agarwal of Kotak Mahindra AMC said commitment to fiscal discipline will increase India's chances of rating upgrade.

“This is positive for India's rating outlook. A sustained reduction in fiscal debt over the medium term would increase the likelihood of a rating upgrade over the medium term to bring India closer to its higher-rated peers,” said Sakshi Gupta, economist at HDFC Bank.

Inclusion in a global bond index is not enough for a rating upgrade. Moody's had earlier said that for this India would have to improve its fiscal calculations.

IDFC First Bank said a rating upgrade is likely in 2026, taking into account India's target of reducing fiscal deficit to 4.50 per cent of GDP.

Finance Minister Nirmala Sitharaman has reduced the fiscal deficit estimate for the current financial year from 5.10 percent to 4.90 percent in the interim budget. This is a huge decline from the revised estimate of 5.80 percent of the previous financial year.

The fiscal deficit is expected to further reduce to 4.50 percent in the financial year 2025-26. Due to Corona, the deficit increased to 9.20 percent in the financial year 2020-21, which the government is constantly trying to reduce.

The dividend payment of Rs 2.11 lakh crore by the RBI to the government for the financial year 2023-24 has helped in reducing the deficit. Which is double the government's estimate. An analyst said that the payment of such a huge amount of dividend to the government by the Reserve Bank is proving to be a big relief on the fiscal front.