Global rating agency Moody’s on Friday maintained a stable ‘outlook’ and affirmed long-term and short-term ratings at ‘Baa3’ and ‘P-3’ respectively for India. It has estimated growth rate of 8 per cent for Fiscal Year 2023-24 and 6 per cent plus for current and next fiscal (2024-25 and 2025-26) years.

This is the last investment-grade rating, and the stable outlook means downward revision in the rating is unlikely in the near term. However, it has cautioned that that an “escalation of political tensions or further weakening of checks and balances” that would undermine India’s long-term growth potential would likely put downward pressure on the rating.

After completion of periodic review, the agency said that the ‘stable’ outlook incorporates the likelihood that India‘s fiscal metrics will continue to gradually improve amid robust growth prospects compared with peers. Upside risks to inflation and correspondingly higher interest rates could challenge efforts to rein in spending and exacerbate already weak debt affordability, it added.

“The credit profile of India balances its large and diversified economy with high growth potential, a relatively sound external position, and a stable domestic financing base for government debt against high general government debt, weak debt affordability and low per capita income,” it said.

This review report has been published at a time when India is pushing hard for rating upgrade. Government officials have maintained that India has neither defaulted not shown any sign of stress in repaying debt. Also, it has managed to keep fiscal deficit in control. However, it appears that rating agency would like to wait for some more time before making any change in sovereign rating which is used by investors for making any investment decision.

Meanwhile, the agency said the country has benefited from traction on infrastructure development, digitalization and the rehabilitation of the financial system. It highlighted that a stronger and more stable economy has emerged from the pandemic. “We do not expect a material reduction in debt amid gradual fiscal consolidation over the next year. Debt affordability will also be challenged by still high global and domestic interest rates,” it said.

Regarding growth projection, it said 8 per cent in FY24 is estimated on account of growth during the first three quarters. This is higher than various estimates. Even the government’s own projection is 7.6 per cent. With contributions from gross fixed capital formation remaining robust amid the authorities’ ongoing emphasis on infrastructure development, the expectation for the current and next fiscal year is well above 6 per cent, but there are some concerns, too.

“There are upside risks to the projections, based on the potential for private consumption to benefit from ongoing disinflation, while private investment could rise as election-related uncertainties clear and policy rates start to fall as inflation normalizes within the Reserve Bank of India’s target band,” it said.

Explaining the credit profile, the agency said that ‘baa’ reflects “susceptibility to event risk, driven by political risk to account for rising sectarian tensions and intensifying domestic political polarization, while the easing of the negative feedback loop between the financial sector and the real economy over the past three years informs our assessment of banking sector risk.”

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