Moody’s: India’s Rating Outlook Stable

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Jan. 22 – International credit rating agency Moody’s reaffirmed India’s rating and scored India as a “Baa3,” which indicates investment grade with a stable outlook. This rating is equivalent to Standard and Poor’s (S&P) and Fitch’s “BBB(-)” rating.

A downgrade would have pushed India into the so-called “junk” status, which would essentially mean that interest rates would increase as they borrowed abroad. More importantly, foreign funds would be forced to exit India if their investor mandate(s) dictated that they could not invest in “junk-rated” countries.

This positive development comes after S&P and Fitch warned India of a possible rating downgrade, and was decided after months of meetings between top Indian ministry officials and Moody’s. The credit rating agency also reported that India’s susceptibility to event risk has been assessed as “low,” yet economic growth could still be negatively impacted by slower global growth.

“Large government deficits and debt ratios as well as supply constraints in the form of infrastructure, policy and administrative inefficiencies constrain [India’s] sovereign credit profile,” Moody’s explained in its rating report. “Government finances are the weakest aspect of India’s macroeconomic profile [and] we expect the government’s fiscal position to remain weaker than peers over the medium term.”

Moody’s further said that India’s subsidy bill has increased due to the high prices of global commodities, and that the Indian government’s efforts to reduce fuel and fertilizer subsidies were too modest to compensate for the high prices.

As a result, the government raised the fiscal deficit target for the current fiscal year to 5.3 percent of its GDP, up from 5.1 percent.

“Fiscal data available thus far suggest that meeting the deficit will present a challenge,” said Moody’s.

The agency also added that improving the fiscal situation will depend on increasing tax revenues and pulling out of Public Sector Undertaking investments more quickly.

Moody’s highlighted that robust domestic savings and a dynamic private sector would provide strength in the medium term. It expects the Indian economy to grow by 5.4 percent from 2012-2013 and by 6 percent in 2013-14. India’s economy grew by 6.5 percent in 2011-2012.

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