Moody's changes India's rating outlook to stable from negative; affirms Baa3 rating

Moreover, Moody's said economic recovery is underway with activity picking up and broadening across sectors.  Following a deep contraction of 7.3 percent in fiscal 2020 (ended March 2021), Moody's expects India's real GDP to surpass 2019 levels this fiscal year (April 2021 to March 2022), rebounding to a growth rate of 9.3 percent, followed by 7.9 percent in the next financial year.

"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 noted.

It said the decision to change the outlook to stable reflects 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 much lesser risk to the sovereign than Moody's previously anticipated,” the rating agency said in its statement. The 'negative' rating was assigned to India in November 2019,

The agency added that while risks stemming from a high debt burden and weak debt affordability in India remain, it is expected 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.

According to Moody's, the Baa3 ratings balance India's key credit strengths, which include a large and diversified economy with high growth potential, a relatively strong external position, and a stable domestic financing base for government debt, against its principal credit challenges. These challenges include low per capita incomes, high general government debt, low debt affordability and more limited government effectiveness.

“India's long-term local-currency (LC) bond ceiling remains unchanged at A2 and its long-term foreign-currency (FC) bond ceiling remains unchanged at A3. The four-notch gap between the LC ceiling and issuer rating reflects limited political event risk that would significantly disrupt the economy and modest external imbalances, balanced by a large government footprint in the economy and limited predictability and reliability of government policies,” the agency explained.

The one-notch gap between the LC and FC ceiling reflects limited external indebtedness and that, despite a history of several forms of capital controls, a debt moratorium remains unlikely, the statement added.

(With PTI inputs)