The impact of the Russia-Ukraine conflict, higher inflation and tightening global financial conditions are unlikely to derail India’s economic recovery from the pandemic, rating agency Moody’s said in a release on Tuesday. Moody’s Investor Service retained its sovereign rating on India at Baa3 with a stable outlook, the release showed.
“Principal credit challenges include low per capita income, high general government debt, low debt affordability and limited government effectiveness,” the agency said in the release.
“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. While risks stemming from a high debt burden and weak debt affordability remain, we expect 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,” Moody’s said.
Factors that could lead to India’s ratings upgrade
Moody’s said it “could upgrade the rating if India’s economic growth potential increased materially beyond our 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.”
On the other hand, Moody’s said, “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.”
Moody’s on Indian banking sector
The rating agency expects Indian banking system’s asset quality to improve further as the economy recovers from the pandemic.
“Most of public sector banks’ stressed assets emerged from loans to businesses related to infrastructure, power and steel, originating between 2009-12. As the economy gradually recovers from the pandemic, operating conditions for banks will be supported by strengthening consumer and business confidence and, ultimately, loan growth. We expect the banking system’s asset quality and profitability to improve. Capital ratios have risen across both public and private banks over the past year, reflecting their ability to raise equity from capital markets, but will moderately decline as loan growth accelerates,” it said. (With Agency Inputs)
Download The Mint News App to get Daily Market Updates.