Moody’s Investors Service says that India’s Baa3 government bond rating balances the strong growth potential of its large and diverse economy against high fiscal deficits, recurrent inflationary pressures, as well as regulatory and infrastructure constraints on competitiveness.
The stable outlook on the rating is based on an expectation that Indian authorities will continue with policy efforts to improve the macro-economic balance and address structural constraints on growth.
These conclusions are contained in the rating agency’s annual credit analysis on India. The report is an update to the markets and does not constitute a rating action.
The report elaborates on India’s sovereign credit profile using four main analytic factors, as per Moody’s Sovereign Bond Rating Methodology. These factors are economic strength, institutional strength, fiscal strength and susceptibility to event risk.
According to Moody’s, India’s high economic strength is a key source of sovereign credit support. India’s GDP growth, savings and investment rates exceed comparable emerging-market averages. Although growth slowed significantly between 2011 and 2014, Moody’s expects it to accelerate from between 5% and 6% over the next year to above 7% thereafter, if global economic and financial conditions remain benign and the government effectively implements its macro-economic and structural reform agenda.
The report says that India’s low per capita incomes limit the government’s tax revenue base and increase spending claims on its resources. This keeps India’s fiscal deficits and government debt ratios higher than those of similarly rated peers, which leads Moody’s to assess India’s fiscal strength as low.
Although inflation has declined in recent months, India’s inflation levels are high compared to rating peers. The report points to recurrent inflation, regulatory complexity and weak infrastructure as constraints on the rating that reflect institutional challenges.
Listing recent policy measures announced by the government and the central bank to address the above challenges, Moody’s notes that individual measures may appear modest in their near-term impact but if they are effectively implemented, and augmented with additional structural reforms, they would enhance India’s operating environment and improve competitiveness.
The report says that the outlook for India’s rating would improve if fiscal, inflation and infrastructure metrics were to move closer to Baa median scores.
On the other hand, the outlook would weaken with a further deterioration in the fiscal position, or rising contingent liabilities from the state-owned banking sector, or a material decline in foreign exchange reserves coverage of external debt and imports.
The material has been provided by InstaForex Company – www.instaforex.com