Fitch Ratings on Friday upped the outlook on India's sovereign rating to 'stable' from 'negative' after two years, citing diminishing downside risks to medium-term growth on rapid economic recovery.

Fitch Ratings kept the rating unchanged at 'BBB-'.

"The Outlook revision reflects our view that downside risks to medium-term growth have diminished due to India's rapid economic recovery and easing financial sector weaknesses, despite near-term headwinds from the global commodity price shock," it said.

The agency, however, cut the economic growth forecast to 7.8 per cent for the current fiscal (April 2022 to March 2023) from the 8.5 per cent prediction it made in March due to the inflationary impact of the global commodity price shock.

"India's economy continues to see a solid recovery from the COVID-19 pandemic shock," Fitch said.

Indian economy grew 8.7 per cent in the last fiscal, and the country's central bank RBI expects growth to be 7.2 per cent this fiscal.

Stressing that India's medium-term growth prospects remain solid, Fitch said India's strong growth outlook relative to peers is a key supporting factor for the rating, and will sustain a gradual improvement in credit metrics.

"We forecast growth of around 7 per cent between FY24 and FY27, underpinned by the government's infrastructure push, reform agenda and easing pressures in the financial sector. Nevertheless, there are challenges to this forecast, given the uneven nature of the economic recovery and implementation risks for infrastructure spending and reforms," Fitch said.

The agency in June 2020 revised the outlook for India to 'negative' from 'stable' on grounds that the coronavirus pandemic had significantly weakened the country's growth outlook and exposed the challenges associated with a high public debt burden.

India enjoyed a 'BBB-' rating since the upgrade in August 2006 but the outlook has oscillated between stable and negative.

Fitch forecast that the fuel excise-duty cuts and increased subsidies (about 0.8 per cent of GDP) announced in May to offset higher commodity prices for consumers will push the central government deficit to 6.8 per cent of GDP compared to the budget's 6.4 per cent target, despite robust revenue growth.

The agency said achieving the 4.5 per cent fiscal deficit target by 2025-26 could prove challenging, as revenue/GDP has already returned to pre-pandemic levels.

"High-interest payments/revenue of 26 per cent of GDP in FY22 constrains fiscal flexibility, particularly in the context of rising sovereign bond yields," it added.

Fitch forecast the debt-to-GDP ratio to drop to 83 per cent in the current fiscal from a peak of 87.6 per cent in 2020-21, but it remains high compared to the 56 per cent peer median.