S&P upgrade likely to cut govt borrowing costs: Finmin official

New Delhi: S&P's upgrade of its long-term sovereign credit rating on India after 18 years citing economic resilience can potentially lower the government's borrowing costs, a senior finance ministry official said.

The upgrade in rating to 'BBB' from the lowest investment grade of 'BBB-' will add to the investor optimism about the country's strong macroeconomic fundamentals, despite persisting external headwinds, including an extra 50% US tariffs on Indian exports, he reckoned.

The yield on 10-year benchmark government securities inched up 10 basis points over the past one month to close at 6.41% on Thursday, but it still remained 45 basis points lower than a year before.


The yield has risen in recent weeks over concerns about lower-than-expected direct tax collections, over-supply of papers and fading hope of an interest rate cut in October, according to analysts.

The central bank has trimmed the repo rate by 100 basis points since February to 5.5% now. The focus has now shifted to transmission.

However, a robust growth outlook, as reaffirmed by S&P, surplus liquidity in the system and overall supportive monetary policy settings will have a positive impact on the G-sec yield, the official said.

S&P expects a strong annual growth rate of 6.8% for India for the next three years, with a 6.5% expansion in FY26.

Retail inflation hit an eight-year low of 1.55% in July. Lower inflation will ease the pressure on the RBI to maintain supportive monetary policies in the coming quarters, S&P has said.

"(Moreover) The fact that S&P also thinks the US tariff impact will be manageable, given India's relatively less reliance on external trade for growth, should also soothe nerves of investors," said another official.

Moreover, monsoon rains have been plentiful, and global crude oil prices have retreated to $67 per barrel after a brief surge in the aftermath of the Israel-Iran conflict, and could stay subdued for the rest of FY26 amid expected steady supply. All these would weigh down the bond yield, officials reckon.

'No supply glut by govt'
The government won't flood the market with its securities and private players won't be crowded out, officials told ET recently. The Centre plans to stick to its FY26 gross market borrowing target of ₹14.82 lakh crore to avoid negative surprises, they had said.

Moreover, it has sharply hiked the capex allocations for the ministries of railways and road transport & highways in recent years. So, it's not using entities linked to these ministries to garner extra-budgetary resources, reducing pressure on the market.

States, too, have been promised ₹1.5 lakh crore in capex loans by the Centre from its budget in FY26. This reduces their market borrowing needs proportionately.