Moody's Investors Service has changed the outlook on India's ratings to "stable" from "negative". It has affirmed the country's foreign-currency and local-currency long-term issuer ratings and the local-currency senior unsecured rating at "Baa3". Moody's has also affirmed India's other short-term local currency rating at "P-3".
The global financial research agency said the decision to change the outlook to "stable" reflects its 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," Moody's said in its latest report.
The ratings agency said while risks stemming from a high debt burden and weak debt affordability remain, it expects the economic environment will allow for a gradual reduction of the general fiscal deficit over the next few years, preventing further deterioration of the sovereign credit profile.
The Moody's report said the affirmation of the Baa3 ratings balances India's key credit strengths. These include a large and diversified economy, with high growth potential, a relatively strong external position, and a stable domestic financing base for government debt.
However, the country'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". It said 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.
Also, 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 rating change comes a few days after India's top officials made the case for sovereign rating upgrade. However, another global agency S&P Global Ratings, in its May report, had said that it sees "no change" in the country's sovereign rating for the next two years.
GDP TO SURPASS 2019 LEVELS THIS FISCAL
Following a deep contraction of 7.3 per cent in fiscal 2020 (ending March 2021), Moody's expects India's real GDP to surpass 2019 levels this fiscal year, rebounding to a growth rate of 9.3 per cent, followed by 7.9 per cent in fiscal 2022. Moody's expects real GDP growth to average around 6% over the medium term, reflecting a rebound in activity to levels at potential as conditions normalise.
RATIONALE FOR CHANGING THE OUTLOOK
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 normalise".
Also, bank provisioning has allowed for the gradual write-off of legacy problem assets over the past few years, it said. In addition, banks have strengthened their capital positions, pointing to a stronger outlook for credit growth.
As per Moody's an economic recovery is underway, with activity picking up and broadening across sectors.
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