S&P Retains India’s Sovereign Rating at ‘BBB-’

S&P Global Ratings retained India’s ‘BBB-’ sovereign rating with a stable outlook, reasoning that the country’s strong external settings will act as a buffer against the risks associated with high government deficit and debt.

It said India’s recovery will gain pace through the second half of fiscal 2022 and into the following year. “If the second wave of Covid-19 continues to abate, we expect India's economic buoyancy to return, and that increased mobility and pent-up demand will power a strong recovery in the second half of the current fiscal year,” S&P said in a statement.

“We expect real GDP growth to rebound to 9.5% in fiscal 2022 on continued normalization of activity and progressively higher vaccination rates,” it said, taking note of the strong base effect.

“A significant proportion of this rebound will be due to the very weak base in the prior fiscal year, when the economy contracted by a record 7.3%,” S&P added while reaffirming the ‘BBB-’ longterm and 'A-3' short-term foreign and local currency sovereign ratings on India. The ratings agency sees 7.8% GDP growth in FY23 and 5.7% the year after.

It warned of enduring damage to the economy from the downturn last year and the second wave of the pandemic. “Implementation and acceleration of key reforms could help to address this risk over the next few years,” it suggested.

It expects retail inflation to moderate to 4.5% by the end of the fiscal, allowing RBI room to support growth.

“In our view, the RBI measures will support its ability to sustain economic growth while attenuating economic or financial shocks,” it said.

It pegs India’s deficit at 11.7% of GDP in FY22 and expects it to remain elevated over the coming years even as the government undertakes some consolidation.

Although the government's robust expenditure programme this year should help the economy to heal faster, it will also further strain its weak finances.

S&P said the pace of India’s ambitious Covid-19 vaccination campaign will be crucial to the mitigation of adverse outcomes from future pandemic waves. The nationwide roll out has picked up pace over the past month, helped by increasing domestic supply.

“India is among a small group of emerging markets with extensive domestic vaccine manufacturing capabilities. Nevertheless, officials face stout challenges in establishing broad-based coverage for the nation’s large population, the majority of which live in rural areas,” it said.

It said the stable outlook reflects expectations that India’s economy will recover following the resolution of the Covid-19 pandemic, and that the country’s strong external settings will act as a buffer against financial strains despite elevated government funding needs over the next 24 months.

The recovery has been moderated by a severe second wave, but S&P expects India to remain a long-term outperformer versus peers with a similar level of income.

No comments: