Japan Credit Rating Agency upgrades India's sovereign rating to A- from BBB+, restoring A rating after 35 years

Synopsis

Indian Economy: Japan Credit Rating Agency (JCRA) has upgraded India’s sovereign credit rating from BBB+ to A-, restoring an A rating for India after more than 35 years. The upgrade follows rating increases by Morningstar DBRS, R&I and S&P Global Ratings. India’s strong economic growth, improving fiscal position, stronger banking system, digital infrastructure and low external vulnerability are supporting the latest rating upgrade.

Japan Credit Rating Agency’s decision on Wednesday to raise India’s sovereign rating from BBB+ to A- has put an 'A' back on India’s credit scorecard after more than 35 years.

What makes this all the more important is that the upgrade follows three rating upgrades in 2025, by Morningstar DBRS and Japan’s R&I, and S&P Global Ratings, which was the first upgrade by a Big Three agency in 18 years.

Also Read: Japanese Credit Rating Agency upgrades India’s sovereign rating to A- from BBB+

The sequence suggests that the improvement in India’s economic fundamentals is no longer being recognised by only domestic experts but by an expanding group of international rating agencies.

But Moody’s and Fitch -- the other two of Big 3 besides S&P -- remain at the lowest investment-grade level, leaving open a question that has persisted for years. Why has India, after such a profound economic transformation, still not made it into the A category with the Big Three?

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An A rating returns after 35 years

JCRA's upgrade is significant because the last time India carried an A-level sovereign rating was in 1988, when Moody’s rated the country A2. India's A rating disappeared after the 1990-91 balance-of-payments crisis, when a foreign-exchange crunch pushed the country to the brink of sovereign default.

More than three decades later, JCRA has moved India from BBB+ to A-, citing solid economic growth, effective economic policies, strong private consumption and public investment and an improvement in the financial system.

Also Read: Neelkanth Mishra hits back at ‘egregiously wrong’ claims on India’s GDP growth

Morningstar DBRS upgraded India in May 2025, S&P followed in August and R&I raised its rating in September. S&P's decision was particularly significant because it was the first upgrade of India's sovereign rating by the agency since January 2007. The sequence has now continued into a second year with JCRA's move.

JCRA's assessment arrived after the latest data showed the GDP grew 7.8% in April-June 2026 (Q1 FY27), beating expectations. India's growth is no longer simply a recovery from the pandemic. It has become a persistent feature of the economy. Private investment is also showing signs of strengthening. Private-sector capital investment rose 11.9% year-on-year in the June quarter while gross fixed capital formation increased to 34.3% of GDP.

The improvement in the financial system is equally important for creditworthiness. JCRA noted that India's banking-sector non-performing loan ratio has fallen below 2%. S&P has also pointed to the recovery of bad loans and stronger bank capitalisation as structural improvements supporting Indian financial institutions.

The Big 3 have barely moved

However, the contrast of JCRA's upgrade of India to A- with the traditional global rating leaders, the Big 3, remains stark. Fitch has retained India's sovereign rating at BBB- since 2006. Moody's has kept India at Baa3, the lowest investment-grade level, since 2020. S&P finally moved India from BBB- to BBB in August 2025 after 18 years.

In other words, India has spent nearly two decades waiting for upward movement from S&P and even longer with Fitch. Moody's last upgrade took place in 2017, when it moved India from Baa3 to Baa2, but it subsequently returned the rating to Baa3 in 2020.

The historical record is even more revealing. Moody's upgraded India to investment grade in 2004, Fitch in 2006 and S&P in 2007. Those upgrades came after the economic acceleration of the 2000s. Since then, however, the Big 3 have been reluctant to move India up the rating ladder, except last year's S&P upgrade.

The puzzle is not that the Big 3 fail to recognise India's growth. Fitch's current assessment, for instance, says India's projected 6.4% growth in FY27 would be roughly three times the median growth of BBB-rated peers. Yet Fitch still points to India's high public debt and debt-servicing burden. S&P similarly describes India as a dynamic, fast-growing economy with a strong external balance sheet while citing weak public finances, high debt and low per-capita income as constraints.

This explains why India's growth performance looks considerably stronger than its rating, while its fiscal metrics remain substantially weaker than those of many A-rated economies.

Why the rating matters to India's economy

A sovereign rating matters because it influences the price at which a country can access international capital. A government rated more creditworthy generally has to offer investors a smaller premium over a risk-free benchmark. That directly affects the government's cost of raising foreign-currency debt.

The effect does not stop at the government. Sovereign creditworthiness becomes an important reference point for banks and companies based in that country. International lenders and bond investors assess a private borrower partly against the risks associated with the country in which it operates. If the sovereign is considered riskier, it can become harder for even financially strong companies to borrow internationally at rates that reflect only their own credit quality.

India provides a concrete example. After S&P upgraded the sovereign in August 2025, the agency upgraded the ratings of ten Indian financial institutions. S&P said the action followed the sovereign upgrade and raised the ratings of seven banks and three finance companies by one notch. This is the sovereign-rating transmission mechanism in practice. An upgrade improves the reference point against which Indian financial institutions are assessed. It can expand the pool of investors willing to hold their debt and potentially reduce their funding costs.

The effect can travel further. Cheaper funding for banks can support credit growth. Lower overseas borrowing costs can improve the economics of infrastructure and corporate investment. A stronger rating can also make Indian government securities more attractive to global investors and improve confidence in the rupee-denominated asset market.

There is another effect that matters particularly for India. A sovereign rating is a shorthand signal about the stability of the macroeconomic environment. A higher rating can therefore reinforce foreign investor confidence, while a downgrade can intensify capital outflows or raise risk premium at precisely the moment an economy is under stress.

However, the market impact should not be exaggerated. An analysis by The Economic Survey of India's historical rating changes found weak or no correlation between rating changes and indicators such as government-security yields, the exchange rate and equity-market returns. But the Survey also argued that ratings can affect foreign portfolio flows and that their pro-cyclical nature can amplify stress in weaker economies.

For India, therefore, moving from BBB to A is not just a matter of prestige. It can gradually reduce the risk premium attached to Indian capital and widen the country's financial room as its economy becomes larger and more integrated with global markets.

India's transformation that ratings struggle to capture

India's case for a higher rating rests on more than GDP growth. The 1991 reforms unshackled the economy and paved the way for high growth, and since 2014, the government has undertaken reforms that have altered the way the economy is taxed, financed and formalised. GST created a common indirect-tax framework across the country. The inflation-targeting regime gave monetary policy a clearer anchor. The Insolvency and Bankruptcy Code (IBC) changed the treatment of corporate distress and bad loans. The banking clean-up of bad loans has resulted in healthy banking sector as against times when stressed assets were allowed to accumulate.

Digital public infrastructure has created another structural advantage. Aadhaar, UPI and other digital systems have lowered transaction costs and made payments and welfare transfers more efficient. JCRA specifically cited India's digital public infrastructure and GST as reforms that have strengthened the foundations for productivity and economic development.

Fiscal policy has also become more disciplined since the pandemic shock. The central government's fiscal deficit, which reached 9.2% of GDP in FY21, has fallen to 4.4% in FY26, with 4.3% targeted for FY27. At the same time, the quality of public spending has improved, increasingly shifting towards infrastructure and capital expenditure.

This is the backdrop against which the recent rating upgrades should be read. India's economy has expanded rapidly without a corresponding deterioration in its external vulnerability. Its government debt is overwhelmingly domestic-currency debt and external debt remains relatively low. Its services exports generate a persistent source of foreign exchange.

Kaushik Das, MD, India, Malaysia and South Asia, Deutsche Bank, argued in a recent column in ET that this combination makes India's rating look unusually conservative. He pointed to the sharp fall in the government's fiscal deficit from 9.2% of GDP in FY21 to 4.4% in FY26 and the government's continued consolidation despite geopolitical shocks and commodity-price volatility. Das also argued that India's debt trajectory is improving while several advanced economies carry much larger debt burdens without facing comparable ratings pressure.

The composition of India's debt matters, Das wrote. Most government debt is denominated in rupees, while external debt is less than 5% of GDP and is largely owed to multilateral institutions. That reduces the currency-mismatch risk that can make sovereigns vulnerable during external shocks.

Das also highlighted the growth-interest differential. If nominal GDP growth remains around 10.5-11%, he argued, economic expansion should continue to outpace the effective cost of government borrowing. That would allow the debt ratio to decline gradually even without an abrupt fiscal contraction.

His central argument is that the BBB rating does not fully capture India's resilience. Das wrote that the country's diversified economy, domestic debt structure and relatively low external vulnerability suggest stronger repayment capacity than the rating category implies. His conclusion is not that India has no fiscal weakness. Rather, the rating should give greater weight to the direction of travel in the fiscal numbers and to the structure of the economy.

Why India has challenged the methodology of Big 3

The Economic Survey 2020-21 devoted an entire chapter to the question, "Does India's Sovereign Credit Rating reflect its fundamentals?" Its answer was an emphatic no. The Survey compared India with countries in the A-to-BBB rating range and found India to be a negative outlier on several measures including GDP growth, inflation, government debt, current-account performance, political stability, rule of law, investor protection and reserve adequacy. It said this outlier status had persisted for two decades.

The Survey also made a particularly strong argument about India's external position. India's external debt was relatively modest and its foreign-exchange reserves were large compared with external obligations. India also had no history of sovereign default. On the Survey's reading, these characteristics should have resulted in a materially higher rating.

It went further by pointing to academic research on bias and subjectivity in sovereign ratings. The literature cited by the Survey identified possible "home bias" in ratings and statistical evidence that poorer countries can face a disadvantage when their fundamentals improve. It also raised the problem of pro-cyclicality -- a downgrade can increase financing costs just when an economy is weakening, potentially making the underlying problem worse.

India's complaint, therefore, is not simply that the agencies are being too pessimistic. It is that their methodologies may give insufficient weight to India's structural strengths while placing disproportionate weight on variables such as per-capita income and government debt.

From the Big 3 agencies' point of view, sovereign ratings measure the probability and willingness of repayment, not economic potential alone. A country can grow rapidly and still have a weaker fiscal position than its peers. Fitch's latest assessment captures this logic that India's growth is exceptionally strong for its rating category, but its combined central and state debt was estimated at 84.4% of GDP in FY26 against a BBB median of 57%, while its interest-to-revenue ratio was 23.7% against a median of 8.4%.

That is why the disagreement persists. India sees a rapidly improving economy whose fiscal risks are becoming more manageable. The Big 3 see a strong growth story that has yet to fully overcome a heavy public-debt burden.

A BRICS solution to the ratings problem?

The frustration over the Big 3's stance eventually produced an institutional response. India pushed the idea of a BRICS credit-rating agency, seeking an alternative to the dominance of S&P, Moody's and Fitch in emerging-market sovereign assessments. The proposal emerged from the belief that the existing ratings system gives too much influence to a small group of Western agencies and does not adequately reflect the circumstances of developing economies.

But the idea has made little progress. A new agency would itself need to establish credibility with global investors, which means demonstrating independence and a methodology that markets trust even when its conclusions are uncomfortable for the governments that helped create it. That difficulty explains why India's stronger argument remains reform of the existing system rather than simply replacing it.

The next test is with Moody's and Fitch

JCRA's A- rating may not prove that the Big 3 are wrong. India's government debt remains high even though most of it is domestic and per-capita income remains far below that of most A-rated economies.

But the sequence of upgrades has changed the nature of the debate. In 2025, Morningstar DBRS, S&P and R&I all moved India higher. In 2026, JCRA has now taken India into the A category. At the same time, the latest GDP data show 7.8% growth in the June quarter and emerging evidence of a broader private-investment cycle.

The Big 3 are therefore facing a more difficult question than they were a decade ago. It is no longer whether India has the potential to become a stronger economy. The evidence of that transformation is increasingly visible in the data. The questi