Moody’s improve rating outlook of India from negative to stable

The rating agency expects India’s real GDP growth to be average around 6% over the medium term, reflecting a potential activity recovery as conditions normalise. 

On October 5, Moody’s Investors Services revised the Government of India’s rating outlook from negative to stable. Moody’s declared the country’s foreign currency and local currency long-term insurer ratings and local currency senior unsecured rating at Baa3.

Moody’s moreover declared India’s other short-term local currency rating at P-3. “The decision to change the outlook to stable reflects Moody’s view that the downside risks from negative feedback between the real economy and financial system are receding,” Moody’s said. Banks and non-bank fiscal organisations pose a much lesser risk to India with higher capital buffers and greater liquidity than Moody’s earlier predictions.

While risks arising from a high debt strain and weak debt affordability persist, Moody’s assumes that the economic environment will permit a progressive decline of the general government fiscal deficit over the coming years, barring further degeneration of the sovereign credit profile.

The rating agency expects India’s real GDP growth to be average around 6% over the medium term, reflecting a potential activity recovery as conditions normalise. The growth projections consider structural challenges, including weak infrastructure and difficulties in labour, land and product markets that continue to constrain private investment and contribute to economic growth post-pandemic economic scars.

The Union government has announced reforms throughout the pandemic that include measures to increase the flexibility of labour laws, raise agricultural sector efficiency, expand investment in infrastructure, incentivise manufacturing sector investment, and strengthen the financial sector.

If implemented effectively, these policy measures will be positive for credit and lead to higher-than-expected growth potential. In contrast, a nominal GDP growth rate of around 10-11% returning to trend over the next few years would allow gradual fiscal consolidation and stabilisation of the public debt burden, albeit at and above pre-global levels.

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