Moody’s upgrades India’s rating outlook to ‘Stable’ from ‘Negative’

With the economy showing improvement, global ratings firm Moody’s Investor Services on Tuesday changed India’s sovereign rating outlook to ‘Stable’ from ‘Negative’ even as it retained the sovereign rating at ‘Baa3’.

‘Baa3’ is the lowest investment grade rating. Obligations related to this rating are subject to moderate credit risk. They are considered medium grade and as such may possess certain speculative characteristics. A ‘Stable’ outlook indicates a low likelihood of a rating change over the medium term. On June 1 last year, India was downgraded to ‘Baa3’ from ‘Baa2’ and outlook changed to ‘Negative’ from ‘Stable’.

Downside risks receding

On the change in outlook, Moody’s said: “The decision... reflects Moody’s view that the downside risks from negative feedback between the real economy and financial system are receding.” Further it said that higher capital cushions and greater liquidity, banks and non-bank financial institutions pose a much less risk to the sovereign than anticipated earlier.

“And 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 reduction of the general government fiscal deficit over the next few years, preventing further deterioration of the sovereign credit profile,” it said.

The rating agency acknowledged that an economic recovery is underway. It expects the real GDP this fiscal to exceed the FY20 level with a growth rate of 9.3 per cent. For 2022-23, its forecast is 7.9 per cent. “Downside risks to growth from subsequent coronavirus infection waves are mitigated by rising vaccination rates and more selective use of restrictions on economic activity, as seen during the second wave. Looking ahead, Moody’s expects real GDP growth to average around 6 per cent over the medium term, reflecting a rebound in activity to levels at potential as conditions normalise,” it said.

The many reforms

The firm noted the reforms announced throughout the pandemic, which include measures aimed at increasing the flexibility of labour laws, raising agricultural sector efficiency, expanding investment in infrastructure, incentivising manufacturing sector investment and strengthening the financial sector.

“If implemented effectively, these policy actions would be credit positive and could lead to higher potential growth than expected. In turn, a return to trend nominal GDP growth of 10-11 per cent over the next few years will allow for a gradual fiscal consolidation and stabilization of the government’s debt burden, albeit at high and above pre-pandemic levels,” the firm said.

On affirmation of rating, Moody’s said this balances India’s key credit strengths, which include a large and diversified economy with a high growth potential, a relatively strong external position, and a stable domestic financing base for government debt, against its principal credit challenges, including low per capita incomes, high general government debt, low debt affordability and more limited government effectiveness.

The firm noted the strength such as large and diverse economy, growing working-age population and opportunities for productivity catch-up to boost growth potential over the long term all support economic strength. Along with these significantly narrower current account deficits and record foreign exchange reserves strengthened India’s external position and reduced its vulnerabilities to external shocks.