Indian bonds are experiencing a period of remarkable credit spread tightening, fueled by a recent sovereign rating upgrade and strong overseas investor interest. This has led to record low credit spreads, creating potentially advantageous conditions for Indian companies in the global financial market.

Key Factors Driving the Tightening

• S&P Global Rating Upgrade: S&P Global Ratings upgraded India's sovereign credit rating to 'BBB' from 'BBB-' on August 16, 2025. This upgrade, the first in 18 years, reflects India's robust economic growth, fiscal discipline, and monetary stability. S&P highlighted India's impressive real GDP growth, which averaged 8.8% from fiscal year 2022 to 2024, outpacing its Asia-Pacific peers. Furthermore, the agency noted the country's fiscal consolidation efforts, with the general government deficit projected to decline from 7.3% of GDP in fiscal year 2026 to 6.6% by fiscal year 2029.
• Overseas Investor Confidence: The rating upgrade has significantly boosted foreign investor confidence in Indian debt. This increased confidence is evident in the tightening of spreads between Indian firms' dollar bond yields and U.S. Treasuries.
• RBI's Inflation Control: The Reserve Bank of India's (RBI) success in controlling inflation, with the headline CPI falling to 1.6% in July 2025, has further reinforced India's external credibility.

Impact on the Indian Bond Market

• Compression of Yield Spreads: Yield spreads on Indian corporate dollar bonds have tightened considerably following the upgrade. Some reports indicate a tightening of 10-14 basis points.
• Reduced Borrowing Costs: The narrowing of spreads translates to lower borrowing costs for Indian companies in international markets. This makes it cheaper for major Indian players to raise funds globally.
• Increased Demand for Indian Bonds: The rating boost has amplified demand for dollar bonds issued by Indian banks and corporations.
• Improved Market Sentiment: The tightening of yield spreads signals improved sentiment regarding India's fiscal outlook, making offshore capital more accessible.

Beneficiaries of the Trend

• State Bank of India (SBI) and EXIM Bank: These quasi-sovereign issuers have seen their spreads narrow significantly. For instance, SBI's 2029 dollar bond spread narrowed to 64 basis points from 77 basis points, while EXIM Bank's 2035 dollar bond spread contracted to 71 basis points from 83 basis points.
• Reliance Industries: The spread on Reliance Industries' January 2032 dollar bond tightened by 14 basis points to 63 basis points.
• Banks and NBFCs: Banks and non-banking financial companies (NBFCs) are among the early beneficiaries of the upgrade, with improved access to offshore funding.
• Other State-Linked Issuers: State-linked issuers, in general, are expected to benefit from the improved access to offshore funding due to the S&P rating upgrade.

Potential Implications

• Cheaper Funding: The trend suggests that Indian banks and lenders can potentially access funds more cheaply, which could be passed on to borrowers.
• Enhanced Global Competitiveness: As borrowing terms for top Indian firms and banks start to rival those offered to established economies, India's global competitive edge could strengthen.
• Ripple Effect on the Economy: Lower funding costs could potentially ripple through the economy, supporting continued growth and broader financial stability.

Credit Rating Agencies in India

Several credit rating agencies (CRAs) operate in India, playing a crucial role in evaluating the creditworthiness of borrowers. These agencies are regulated by the Securities and Exchange Board of India (SEBI). Some of the major CRAs in India include:

• CRISIL (Credit Rating Information Services of India Limited)
• ICRA Limited
• CARE Ratings Limited
• India Ratings and Research Pvt. Ltd
• Acuite Ratings & Research Limited

These agencies assess credit risk, provide independent opinions, and improve market efficiency by offering unbiased assessments. They typically rate debt instruments, structured finance products, bank loans, and infrastructure projects.