We expect Indias sovereign rating to remain stable in next 12 months. Decisive and timely action by the government to reduce the fiscal deficit through lower expenditure, moderate rural wage growth in line with productivity, and reduced energy subsidies would be needed to trigger an upgrade, Morgan Stanley said.
Indias is currently rated BBB- by all rating agencies; only S&P has India on a negative outlook. While the rating agencies do not detail specific triggers for a downgrade, S&P is looking for stronger growth, fiscal account consolidation and lower inflation to revise the outlook to stable.
While India scores well on variables, such as GDP growth and forex reserves, it needs to show considerable improvement in inflation, fiscal balance and current account deficit to potentially be upgraded.
Morgan Stanley economics team expects Indias inflation rate to be reduced to 6.5% over the next 12 months. While this is an improvement from the current level, it still compares unfavourably with the average BBB-rated EM sovereign (4.8%), and average EM sovereign rated A and above (2.6%).
Similarly, Indias fiscal balance expectation (-6.4% of GDP) compares unfavourably with EM sovereigns rated BBB (-1.9% of GDP) and A (-2.1% of GDP).
The factors like reforms to target reducing inflation, cutting the fiscal deficit, and encouraging FDI inflows to boost productivity and improving growth, is critical for achieving the governments aim of sustainable and higher growth. If these key areas are targeted effectively, it would not only boost productivity, but also improve the credit rating for the sovereign, the report said.
A pick-up in economic growth and rising private capital needs will be important drivers for Indian credit markets.
We expect the size of the bond market to reach $160 billion by 2018, driven by non-financials. Economic growth and capital needs will be important, but the key driver will be a gradual increase in reliance on debt capital markets. On average, the Indian bond market should see annual gross issuance in excess of $25 billion in the years to 2018," the report said.