India’s credit profile reflects key strengths including its large and diversified economy with high growth potential, a relatively strong external position, and a stable domestic financing base for government debt, rating agency Moody’s said in a report on Tuesday.
The Indian economy has higher capital buffers and greater liquidity and as such, the risk from the negative feedback between the economy and financial system are receding, the agency said. The agency has allotted a Baa3 rating for the Government of India with a stable outlook.
“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,” it said.
The agency expects India’s economic environment to allow for a gradual narrowing in the general government fiscal deficit over the next few years, avoiding further deterioration in the sovereign credit profile. However, the risks from a higher debt burden and weak debt affordability persist.
Moody’s may 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 can led to a significant and sustained pickup in private sector investment.
A continued rise in India’s debt burden can weaken its fiscal strength and may lead to a negative rating action.
Moody’s has forecast India’s real GDP to grow at 7.6% in FY23 and 6.3% in FY24.
Further, the agency does not expect any rising challenges to the global economy, including the impact of the Russia-Ukraine military conflict, higher inflation, and the tightening financial conditions on the back of policy tightening, to derail India’s ongoing recovery from the pandemic in 2022 and 2023.
“We expect India’s general government debt burden to have peaked at around 84% of GDP in the fiscal year ended March 2021 (fiscal 2020), up from pre-pandemic levels of about 70% in fiscal 2018. We expect debt to stabilize around 80% of GDP, still significantly higher than the Baa-rated peer median of around 55%,” it said.