The country, however, is set to remain among the fastest-growing sovereigns globally, it said.

Fiscal metrics remain a credit weakness, with deficits, debt and debt service burden all high compared to 'BBB' range peers. Lagging structural metrics, including governance indicators and GDP per capita, also weigh on the rating, the rating agency noted in a release.

India's ratings are underpinned by its strong medium-term growth outlook, which will continue to drive improvement in structural aspects of its credit profile, including India's share of GDP in the global economy, as well as its solid external finance position, it said.

Strengthening fiscal credibility from recent achievement of deficit targets, enhanced transparency and buoyant revenues, have increased the likelihood that government debt can follow a modest downward trend in the medium term.

Public infrastructure capital expenditure remains a key growth driver and has improved spending quality, helping mitigate the drag from fiscal consolidation.

There are signs of a nascent pick-up in manufacturing investment.

A key risk is if this private investment cycle does not materialise as a result of subdued consumption, which would weigh on job creation and dampen potential benefits from India's demographic dividend.

Coalition politics and a weakened mandate will likely constrain the government's ability to enact major economic reforms, limiting upside to potential growth. Still, state governments are likely to steadily advance reforms around land and labour, Fitch Ratings noted.

It believes that the Indian government will achieve its FY26 deficit target of 4.5 per cent of GDP or below, which was set in the FY22 budget, as it forecasts a 4.4 per cent deficit.

After FY26, it forecasts steady deficit reduction of 0.2 per cent of GDP per year to about 3.8 per cent in FY29, assuming sustained strong revenue growth and a slight reduction in capex spending.

On a general government basis, the deficit is forecast to fall to 7.3 per cent of GDP in FY26 and 6.6 per cent by FY29, based on aggregate state deficits of 2.8 per cent.

India's external finances remain a rating strength, underpinned by high foreign exchange reserves, a net external creditor position, and a low current account deficit.

Fibre2Fashion News Desk (DS)