Moody’s retains India rating with stable outlook. All you need to know

Ratings agency Moody’s Investors Services has retained India’s sovereign credit rating at Baa3’ - the lowest investment grade score- even as it has persisted with a “stable” outlook on the country’s economy. 

So, what did Moody’s say were the biggest drivers for it to affirm its ratings?

The agency cited the country’s large and diversified economy with high growth potential, a relatively strong external position, and a stable domestic financing base for government debt for the decision to affirm the rating.

It said the stable outlook has been retained because “risks from negative feedback between the economy and financial system are receding.”

But hadn’t Moody’s recently lowered India’s growth forecast?

Last Wednesday, a day after official data showed a lower-than-expected rate of expansion for the Indian economy in the June quarter, Moody’s sharply trimmed its growth forecast for the country to 7.7% for the calendar year 2022 from its earlier projection of 8.8%.

Lowering its projections, Moody’s stated that rising interest rates, uneven distribution of monsoons, and slowing global growth are expected to dampen India’s economic momentum on a sequential basis. India’s growth is projected to drop further to 5.2% in 2023, it said, partly as the base normalises.

What were the June quarter growth numbers like?

The June quarter growth of 13.5% was closer to the lower band of the 12-17% range forecast by analysts and below the 16.2% predicted by the RBI's Monetary Policy Committee.

Does Moody’s think any external macroeconomic or geopolitical factors could derail the Indian recovery from the pandemic?

Not really. Moody’s doesn’t expect rising challenges to the global economy, including the impact of the Russia-Ukraine military conflict, higher inflation, and the tightening financial conditions on the back of policy tightening, to derail India’s ongoing recovery from the pandemic.

When did Moody’s change India’s sovereign credit outlook last?

Moody’s had in October 2021 changed the outlook on the Government of India’s ratings to stable from negative and affirmed the country’s foreign-currency and local-currency long-term issuer ratings and the local-currency senior unsecured rating at Baa3.

What, according to Moody’s, are India’s major credit challenges?

According to Moody’s, principal credit challenges for India include low per capita income, high general government debt, low debt affordability and limited government effectiveness.

The agency said it could upgrade India rating if the country’s economic growth potential increased materially beyond its expectations, supported by effective implementation of economic and financial sector reforms that led to a significant and sustained pickup in private sector investment.

Effective implementation of fiscal policy measures that resulted in a sustained decline in the government’s debt burden and improvements in debt affordability would also support the credit profile, it added.

Among factors that could lead to a downgrade of India, it listed “weaker economic conditions than we currently expect that pointed to lower growth over the medium term and/or a resurgence of financial sector risks.”