Moody's retains stable outlook on India's sovereign rating

The global rating agency Moody's retained its stable outlook on the sovereign rating at Baa3, citing the country's large and diversified economy and healthy private savings rate.

Projecting a 7.5% GDP growth next fiscal, Moody's sovereign credit analyst Atsi Sheth in a note pegged average retail inflation at 6.5% at end-March 2016, up from 4.6% this fiscal.

"Our assessment of the country's economic strength as 'high' balances the large size, sectoral diversity and growth potential against its still low levels of per-capita income and weak social and physical infrastructure," Sheth said, and retained the current sovereign rating at Baa3 with a stable outlook.

"The outlook on the Baa3 rating is stable, reflecting the balance between credit support offered by the country's favourable growth prospects and the credit risks from inflation, infrastructure and fiscal metrics, which are weaker than similarly rated peers," she said.

The rating and outlook can change "if there is a growth recovery accompanied by improvement in fiscal, inflation and balance of payments metrics. A reduction in infrastructure bottlenecks and in regulatory red tape would raise potential growth and competitiveness, which would also be credit positive," she added.

On the growth momentum, she said in the last decade,the average GDP growth rate has outperformed similarly rated peers, and "we expect the gap to persist".

Citing high government debt and deficits, weak physical and social infrastructure, recurrent inflation and regulatory uncertainty and complexity as credit challenges for the nation, the report said: "Government finances are the weakest aspect of the credit profile, which we assess as low."

"The government debt ratios and fiscal deficits are higher than those of similarly rated peers and are expected to remain so over the rating horizon. Low incomes limit the government's tax base, while at the same time increasing social spending pressures," it added.

The report said the country's susceptibility to event risks is 'moderate'. At this time, banking sector weakness is a key source of susceptibility to event risks. Slower growth coupled with high inflation and interest rates in the last two years have eroded banking sector asset quality and profitability, particularly among state-owned banks.

"This has increased the fiscal costs of banking sector support, raised domestic financial risks and will limit the support provided by credit growth during the early stages of the current economic recovery," it said.

Sheth pegged general government balance as percentage of GDP at minus 6.7% next fiscal, a marginal improvement from minus 6.9% this fiscal.

The report also predicts an improvement in the general government debt to revenues ratio at 302.9 from 309.2, while the government interest payments as part of the GDP will come down to 22.4% from 23%.

On the much feared current account balance front too the report is positive pegging CAD at -0.6% of GDP next fiscal, down from 1.1% this fiscal.

On the rising forex reserves, which touched $338 billion as of end February, which is the highest ever, the report said country's balance of payments exposure to global growth and financial shocks is mitigated by official foreign exchange reserves that are adequate to cover current account and external debt repayment needs.