Global ratings agency Moody’s Investors Service on Tuesday retained the lowest investment grade rating (Baa3) on India’s sovereign rating but changed the outlook to stable from negative, citing that the downside risks from negative feedback between the real economy and financial system are receding.
S&P and Moody’s have a stable outlook on India’s ratings while another agency Fitch has a negative outlook but all three agencies have the lowest investment rating for the country.
The upgrade in the outlook by Moody’s will add to the positive sentiment and assure investors about the strength of the economic recovery underway as well the state of public finances. The sharp acceleration in vaccination across the country has also lent comfort and added to hopes for a sustained recovery in the months ahead.
With higher capital cushions and greater liquidity, banks and non-bank financial institutions pose much lesser risk to the sovereign than Moody’s previously anticipated. 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.
It said that bank provisioning has allowed for the gradual write-off of legacy problem assets over the past few years. In addition, banks have strengthened their capital positions, pointing to a stronger outlook for credit growth to support the economy. An economic recovery is underway with activity picking up and broadening across sectors, the ratings agency said.
“Following a deep contraction of 7.3% in fiscal 2020 (ending March 2021), Moody’s expects India’s real GDP to surpass 2019 levels this fiscal year, rebounding to a growth rate of 9.3%” according to Moody’s. It said that 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.
