Global ratings agency Moody’s Investors Service 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. All three have the lowest investment rating for India.
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, preventing further deterioration of the sovereign credit profile,” the agency said.
Economic growth has rebounded after the lifting of restrictions and revenues have stabilised, and the fiscal deficit at the end of August was at an 18-year low for the first five-month period. It said that bank provisioning has allowed for the gradual write-off of legacy problem assets over the past few years.
Moody’s 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 of Covid.