New Delhi: India now has its sovereign credit rating outlook revised to stable from negative by Moody’s Investors Service, on receding risks posed by the financial sector to the overall economy.
The country’s credit rating was, however, unchanged at Baa3, the lowest investment grade.
“The decision to change the outlook to stable reflects Moody’s view that the downside risks from negative feedback between the real economy and financial system are receding. With higher capital cushions and greater liquidity, banks and non-bank financial institutions pose a much lesser risk to the sovereign than Moody’s previously anticipated,” the rating agency said in a statement.
While risks from a high debt burden and weak debt affordability remain, Moody’s expects the economic environment to allow for a gradual reduction of the fiscal deficit over the next few years, preventing a deterioration of the sovereign credit profile.
K.V. Subramanian, chief economic adviser in the finance ministry, said the outlook upgrade acknowledged the government’s assessment that the fundamentals of the Indian economy are strong.
“They have mentioned that the change in outlook stems from lower risks from the financial sector and its impact on the real economy. This is crucial because the slowdown in growth pre-pandemic itself was because of the financial sector. With several reforms having been implemented in the financial sector and the prospects for the sector looking better, there is ample scope for further re-calibration in their assessments,” he added.
Moody’s rating action has been fickle in the recent past, with four rating actions in the past five years. In November 2017, Moody’s upgraded India’s sovereign rating to Baa2 with a stable outlook, citing the government’s structural reforms will lift India’s economic growth. In November 2019, it changed the outlook to negative from stable with a Baa2 rating. However, in June 2020, it downgraded India back to Baa3, the lowest investment grade with a negative outlook.
S&P Global Ratings and Fitch Ratings have also assigned India the lowest investment grade but with a stable and negative outlook, respectively.
Moody’s said risks that a negative feedback loop between the financial sector and real economy set in have receded, resulting in lower susceptibility to event risk. “Solvency in the financial system has strengthened, improving credit conditions, which Moody’s expects to be sustained as policy settings normalize. 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.”
Moody’s has projected the Indian economy to grow at 9.3% in FY22 over a 7.3% contraction in FY21. “Moody’s expects India’s real GDP to surpass 2019 levels this fiscal year, rebounding to a growth rate of 9.3%, followed by 7.9% in fiscal 2022. 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,” it added.