India’s fiscal conditions will continue to constrain its credit strength in 2025, although tension in US-China relations could benefit the Indian economy, Moody’s Ratings said on Wednesday.

In its report on Asia Pacific Sovereigns, Moody’s Ratings said growth and inflation are levelling out, with strong domestic demand bolstered by modest easing in global and regional financial conditions.

But proposed trade restrictions by the US would weaken economic output across the region.

“India’s fiscal conditions will continue to constrain its credit strength in 2025. We expect only gradual fiscal consolidation, and debt to remain significantly higher than the Baa-rated peer median of around 57 per cent,” Moody’s said.

“Despite gains in revenue in recent years, we also expect debt affordability to remain much weaker than rated peers,” it added.

It said politics and social unrest pose significant economic and fiscal risks. In APAC, geopolitical risks will persist in 2025, flowing from tensions in the US-China relationship and around regional hotspots.

Moody’s assesses a low likelihood of military conflict in the Taiwan Strait or Korean Peninsula, and tensions will remain elevated, particularly driven by US-China relations.

“These tensions are shaping trade and investment flows, which may be further diverted away from China as the US tightens investment in strategic sectors, further weakening China’s economy and dampening regional growth. However, this shift could benefit India and Southeast Asian economies,” Moody’s said.

A range of geopolitical and domestic political risks persist, it said, adding after elections in key economies, governments may need to make choices whether to fulfill pledges or to focus on fiscal consolidation.