Moody’s Investor Service on Tuesday said it has retained its sovereign rating on India at ‘Baa3’ with a stable outlook. It also added that the impact of the Russia-Ukraine war, higher inflation and tightening global financial conditions are unlikely to derail India’s economic recovery from the pandemic.
“The stable outlook reflects our view that the risks from negative feedback between the economy and financial system are receding. With higher capital buffers and greater liquidity, banks and nonbank financial institutions (NBFIs) pose much less risk to the sovereign than we previously anticipated, facilitating the ongoing recovery from the pandemic,” Moody’s in a statement said.
It added that while risks stemming from a high debt burden and weak debt affordability remain, Moody’s expects that the economic environment will allow for a gradual narrowing in the general government fiscal deficit over the next few years, avoiding further deterioration in the sovereign credit profile.
The rating agency said, “Principal credit challenges include low per capita income, high general government debt, low debt affordability and limited government effectiveness.”
Moody’s also said the agency could upgrade the rating if India’s economic growth potential increased materially beyond its expectations, supported by effective implementation of economic and financial sector reforms that led to a significant and sustained pickup in private sector investment. Effective implementation of fiscal policy measures that resulted in a sustained decline in the government’s debt burden and improvements in debt affordability would also support the credit profile.
“Weaker economic conditions than we currently expect that pointed to lower growth over the medium term and/or a resurgence of financial sector risks would put downward pressure on the rating. Slower growth than we project would contribute to a continued rise in the debt burden, which could weaken the sovereign’s fiscal strength further and lead to a negative rating action,” it said.
According to the official data, India’s GDP grew 13.5 per cent in the June 2022 quarter (Q1FY23) as compared with the 20.1 per cent growth registered in Q1 2021-22. It was the fastest growth in a year, as the country’s GDP had grown at 4.1 per cent in the previous quarter (Q4FY22), 5.4 per cent in the December 2021 quarter of FY22, and 8.4 per cent in September 2021 quarter.
During April-June 2022, India’s gross value added (GVA), which is GDP minus net product taxes and reflects growth in supply, grew 12.7 per cent.
RBI Governor Shaktikanta Das on Monday also said in the current turbulent global environment, the resilience exhibited by Indian financial markets reflects the robust macroeconomic fundamentals of the economy, and the proactive and strategic policy interventions to mitigate the impact of the two black swan events that have occurred in quick succession — the COVID-19 pandemic and the war in Europe.
