Fitch affirms India's rating at BBB-, maintains stable outlook

It expects growth to rebound to 6.7 percent by financial year 2025.

Fitch believes that India is an attractive destination for foreign firms, courtesy its large domestic market. It also cautions by asking whether India will be able to realise sufficient reforms to allow the economy to benefit from the supply chain integration globally, including the China +1 strategy, which encourages diversification in investment decisions.

"Service sector exports, however, are likely to remain a bright spot," the note said.

The ratings agency expects India's headline inflation to decline but remain near the Reserve Bank of India's 2-6 percent target band, averaging 5.8 percent in the current financial year.

India's rating is a reflecting of its strengths from a robust growth outlook compared to peers and resilient external finances, which have supported the country in navigating large external shocks over the last 12 months, according to Fitch. However, they are offset by weak public finances, high deficits and debt relative to peers and lagging structural indicators.

Fitch adds that India's growth prospects have brightened as the private sector is poised for stronger investment growth, supported by the government's infrastructure drive. Despite this, the risks remain, given the low labour force participation rates and an uneven reform implementation record.

Sustained improvements in asset quality has contributed to stronger bank balance sheets, who appear well-positioned to support sustained credit growth if capitalisation is well managed, as per the Fitch report.

The government's medium-term fiscal target will be challenging to achieve, according to Fitch, who also added that future deficit reduction is most likely to come from a cut in expenditure.