Moody’s upgrades outlook on India’s sovereign rating to Stable

Rating agency Moody’s Investors Service upgraded the sovereign rating outlook of India to stable from negative.

Highlights

  • This rating was upgraded citing reduced risks from COVID-19 as well as negative feedback between real economy & financial system.
  • Moddy’s has retained India’s rating at Baa3. It reflects the lowest investment grade rating.
  • Moody’s further expects that real GDP will surpass pre-pandemic levels of 2019-20 in the year 2021 itself. This is because the ongoing economic recovery is picking up as the activity are broadening across sectors.
  • Moody’s expects that 2021-22 will record a growth of 9.3% in GDP.

Background

Moody’s had downgraded India’s sovereign rating to Baa3 from Baa2 in June 2020 with a negative outlook.

Why Moody’s has upgraded the rating?

As per Moody’s, downside risks on growth because of coronavirus infection waves are lowering because of rising vaccination rates and selective use of restrictions on economic activity. Furthermore, higher capital cushions and greater liquidity highlights that banks & non-bank financial institutions have a lesser risk to the sovereign now.

Impact on fiscal deficit

According to Moody’s, economic environment will lead to a gradual reduction of general government fiscal deficit in next few years. It will also prevent further deterioration of sovereign credit profile.

Real GDP

In the medium term, Moody’s predicts that real GDP will increase to around 6%, reflecting a rebound in activity to levels at potential. This growth was predicted by taking into account the weak infrastructure, structural challenges as well as rigidities in labour, land & product markets.

Debt Burden

As per Moody’s, higher debt burden and weaker debt affordability will persists as compared to pre-pandemic times. It will contribute to ‘lower fiscal strength’. This is why Moody’s has given Baa3 rating.

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