Foreign capital inflows set to rise post S&P upgrade, borrowing costs to ease: BoB Economist

Time of India

21 hours ago

Foreign capital inflows into India are likely to accelerate following S&P's recent credit rating upgrade, which is also expected to lower borrowing costs for the country, said Sonal Badhan, Economist at
Bank of Baroda
(BoB).
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"In both the short and long term, foreign capital inflows can be expected to be impacted positively, as the upgrade reaffirms trust in India's 'sound fundamentals' and 'growth momentum'. We are likely to see higher FPI inflows this year and a decline in bond yields," BoB Economist Told ANI.
According to Badhan, India's recent credit rating upgrade by S&P is set to accelerate foreign capital inflows, particularly into the debt market, and lower borrowing costs for both the government and corporates, according to an economist.
The RBI's Annual Financial Account data for Q2 of FY 2024-25 (July-September 2024) indicates that the Net foreign direct investment recorded an outflow of USD 2.2 billion, compared to an outflow of USD 0.8 billion during the same quarter in FY 2023-24.
India recorded provisional FDI inflows of USD 81.04 billion in FY 2024-25, marking a 14 per cent increase from USD 71.28 billion in FY 2023-24, according to the government data.
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"While there will be more room for the government to borrow, we believe it is unlikely that the government will make use of it. In the union budget for FY26, the centre had committed to gradually bring its debt-GDP ratio down, thus implying its intent to keep the borrowing program range bound," she added.
"In the Union Budget for FY26, the Centre had committed to gradually bring its debt-to-GDP ratio down, implying its intent to keep the borrowing programme range-bound," the economist said.
BoB economist further added that the impact on borrowing costs is expected to be swift after the upgradation of the rating.
"This will definitely help lower the borrowing cost for both government and corporates, as the rates for corporates mimic the trend in the G-sec market. The impact will be almost immediate, as we have already seen ~8bps decline in 10Y G-sec bond yields after the decision came," she added.
Badhan further added that the upgrade is also likely to encourage other rating agencies, such as Moody's and Fitch, to follow suit.
"We expect other rating agencies also to follow suit, as the upgrade has been long overdue. Indian economy has consistently performed well even amidst turbulent global environment and our central government fiscal deficit ratio has also consistently remained on track of consolidation, without compromising upon the impetus required to provide growth a boost," the economist said.
In a significant boost to investor confidence, S&P Global Ratings has upgraded India's long-term unsolicited sovereign credit rating to 'BBB' from 'BBB-', while also raising the short-term rating to 'A-2' from 'A-3'.
The outlook on the long-term rating remains stable, reflecting optimism around India's policy continuity, robust economic growth, and improved fiscal management.
Alongside the rating upgrade, S&P also revised its transfer and convertibility assessment for India to 'A-' from 'BBB+', citing an improved monetary and external environment.
According to S&P, the stable outlook suggests confidence in India's ability to sustain its growth trajectory, driven by high levels of infrastructure investment and a disciplined policy environment.