NDTV Explains: India And The US' Awkward 'AAA' Ratings Cut, Debt Story

The United States has faced a series of credit rating downgrades from major agencies, with Moody's being the latest to lower its rating to 'AA1' due to a growing federal deficit projected to reach 9% by 2035, adding to previous downgrades by S&P and Fitch citing governance concerns and rising debt levels, now at $36 trillion. Despite these downgrades, the US maintains strong credit ratings, and Moody's anticipates a return to 'AAA' through increased revenues or reduced spending; however, the White House has criticized the downgrades as politically motivated, while the long-term impact on borrowing costs and the dollar's value remains uncertain.

Analysis

The United States' sovereign creditworthiness has experienced a significant erosion, culminating in Moody's downgrade to 'AA1' on May 16, 2025, following similar actions by S&P Global in 2011 (to 'AA+') and Fitch in 2023 (to 'AA'). Moody's cited a growing federal deficit, 6.4% in 2024 and projected to reach 9% by 2035, as the primary driver. This series of downgrades reflects persistent concerns over deteriorating governance standards, weakened policymaking predictability, and escalating fiscal challenges, with US national debt currently standing at $36 trillion and increasing by approximately $1 trillion every three months since 2002. The US debt-to-GDP ratio reached 122.5% as of April 2025, placing it among the highest globally. The White House has contested Moody's latest decision, labeling it politically motivated. Concurrently, proposed fiscal measures, such as the 'One Big, Beautiful Bill,' are anticipated to add nearly $4 trillion to the national debt over the next decade, despite claims of cost-cutting elsewhere. The US has raised its debt ceiling 78 times since 1960 to avoid default, and the current debt level has again breached this limit, underscoring ongoing fiscal precarity. In contrast, India, rated 'BAA3' by Moody's and 'BBB-' by Fitch and S&P, presents a more stable, albeit still significant, debt profile. India's external debt is approximately $718 billion, with a debt-to-GDP ratio around 80%, which the government aims to reduce annually towards a 50% target; the Reserve Bank of India projects a potential decline to 73.4% by 2030. India's fiscal deficit was reported at 4.8% for FY25, and a majority of its debt is held internally, unlike the US where significant portions are held by foreign entities. US household debt-to-GDP also stands high at roughly 73% at end-2024, compared to India's 40%. While Moody's expects the US to eventually regain its 'AAA' rating, the immediate implications include potentially higher borrowing costs for the US and mixed effects on currency markets, with a general sentiment that is negative and cautionary (sentiment score -0.55).

Key Decisions for Investors

• Investors should closely monitor US fiscal policy developments, particularly upcoming debt ceiling negotiations and the trajectory of the federal deficit, given the successive credit rating downgrades.
• Consider portfolio diversification by evaluating exposure to economies with more robust fiscal outlooks and proactive debt management strategies, such as India, which is actively working to reduce its debt-to-GDP ratio.
• Be prepared for increased volatility in US Treasury yields and the US dollar; assess and potentially hedge currency exposure if holding significant US dollar-denominated assets.
• While US sovereign debt remains highly rated ('AA1' from Moody's), the negative trend warrants careful risk assessment for long-term allocations, particularly regarding the sustainability of US debt levels and future financing costs.