Strong growth, lower fiscal deficit may lead to India rating upgrade: Deutsche Bank

Mumbai: Strong growth and a narrower fiscal deficit can lead to a sovereign rating upgrade for India, a German brokerage said on Monday. The government's commitments on fiscal deficit to 5.1 per cent in FY25 and further down to 4.5 per cent in FY26 "look more credible now", analysts at Deutsche Bank said, pointing out that the number came in at 5.6 per cent in FY24 as against the budgeted 5.8 per cent.

Courtesy the higher than expected dividend announcement by the Reserve Bank of India (RBI) at Rs 2.1 lakh crore, the fiscal deficit for FY25 can come down to 5 per cent as against the budgeted 5.1 per cent.

On growth, the note said it expects real GDP expansion to come at 6.9 per cent in FY25 and go down further to 6.5 per cent in FY26.


"Strong growth, lower fiscal deficit opens up room for ratings upgrade," the note said.

"A faster-than-anticipated pace of fiscal consolidation could pave the way for a sooner-rather-than-later sovereign rating upgrade for India," the analysts said.

It can be noted that global rating agency S&P had last week revised up the outlook on its sovereign rating for India to "positive" from "stable" earlier.

On Friday, official data suggested that the economy grew at a faster clip of 8.2 per cent in the March quarter, which takes the FY24 real GDP growth to 7.6 per cent.

The note said the Indian economy has exhibited "remarkable resilience" despite higher rates for longer, the Russia-Ukraine war and Covid prior to that, though a strong pickup in real GDP growth during FY24 can be also attributed materially to a very low GDP deflator.

It explained that nominal GDP growth slowed to 9.6 per cent in FY24, from 14.2 per cent in FY23 and 19 per cent in FY22. But in real terms, GDP growth accelerated to 8.2 per cent in FY24 from 7 per cent in FY23, thanks to a collapse in the GDP deflator to 1.4 per cent in FY24 from 7.6 per cent year-on-year in FY23 and 9.4 per cent in FY22.

Deutsche Bank also advised caution on reading the headline GDP numbers, pointing out that while the real GDP grew 8.2 per cent, real GVA (gross value added) growth was 1 percentage point lower at 7.2 per cent.