S&P ratings upgrade

Imagine you're lending money to a friend. Before you lend, you'd want to know how likely they are to pay you back, right? In the financial world, countries also get a "credit score" called a credit rating. This rating tells investors how risky it is to lend money to that country (by buying their government bonds).

Last week, S&P Global Ratings gave India a better credit score, upgrading it to BBB from BBB-. This is good news because it means S&P believes India is more likely to pay back its debts, and that India's fundamentals remain strong. This puts India in the same league as countries like Mexico and Indonesia.

This upgrade happened even though the US, under President Trump, put 50% tariffs on goods imported from India. Many thought this might hurt India's economy a lot - some experts were of the view that if the tariffs come into effect, India's exports to the US may fall by 60%, which would in turn, put 1% of our GDP growth at risk. However, based on the current weight of the evidence, S&P believes India's economy is strong enough to handle these duties because most of its growth (about 60%) comes from people buying things within India, not just from exports.

When the news came out, India's government bonds became more attractive, and their interest rates (10-year yields) went down from 6.5% to 6.4%. This is like your friend saying they're more reliable, so you're willing to lend them money at a lower interest rate.

The rating agency added that it expected India’s GDP to grow at an annual rate of 6.8% over the next three years. Last week, the RBI also said that it projected 6.5% growth for the current fiscal year, with Governor Malhotra adding that the nation should aspire for a higher growth path.

In short, S&P's upgrade is a sentiment booster and a vote of confidence in India's economic future, suggesting it can keep growing despite challenges like trade tariffs.

So, what markets are likely to benefit from the upgrade one may ask? Below is a list:

Likely beneficiaries of S&P’s upgrade of India:

• • Indian government bonds: Demand for domestic bonds from foreigners is likely to increase, which means yields may drop (bond prices may rise)
• • Indian rupee: Stronger capital inflows and improved risk perception can support the currency.
• • Indian equities overall: A credibility boost often attracts foreign portfolio inflows. Index-heavy sectors may see buying.
• • Rate-sensitive sectors: Banks, NBFCs, real estate, and autos can gain from lower funding costs and an improved credit environment
• • Domestic plays: Consumer discretionary, staples, telecom, and services will benefit as S&P highlighted India’s consumption-led growth resilience.
• • Financials: Banks (especially PSU banks) and insurers may see valuation support as sovereign risk falls.
• • Infrastructure and capex-linked stocks: Capital goods, construction, and utilities can benefit if lower rates and confidence spur investment.
• • Indian corporate bonds: Tighter spreads as sovereign upgrade improves the baseline for credit risk.
• • India-focused ETFs/ADRs and EM funds with India overweight: Near-term inflows likely.

Trivia:

The last time S&P gave India a sovereign rating upgrade was 18 years ago, in 2007.