India at higher economic risk: Moody's

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Bangalore, Aug 4:: Moody's Investors Service says that the risks confronting India's economy have grown, but not yet to the extent that the government's Baa3 foreign currency and Ba2 local currency ratings are threatened.

"Higher oil prices and the lack of adequate fiscal policy reactions amidst high pent-up price pressures are putting the burden of macro-economic adjustment on the monetary authorities," says Mr. Aninda Mitra, a VP/Senior Analyst with Moody's Sovereign Risk Unit.

"As a result, policy as well as market interest rates could rise, and a sharp deceleration in growth may follow," says Mitra.

Concurrently, "greater government borrowing needs, while not leading to a material deterioration of its key credit metrics, would likely prevent an improvement in the remainder of FY08-09, contrary to our earlier expectation," adds Mitra.

Mitra made his remarks in conjunction with the release of a new Moody's report - which he authored - on the outlook for India's sovereign ratings.

In the report, he examines the economic factors which drive the ratings as well as the reasons behind the two-notch differential between its Baa3 foreign currency rating and Ba2 local currency rating. He analyzes various scenarios, built around certain oil price assumptions, which could stress India's credit metrics.

Furthermore, political issues play a role in India's fiscal problems, the report says. The government's fiscal difficulties relate partly to its inability to raise retail fuel prices and reduce the growing, off-budget fiscal cost of reimbursing downstream oil companies as part of its subsidies program.

"While Moody's overall assessment is that the current constellation of risks is captured in the prevailing stable outlook, downside pressures could emerge," Mitra says, adding, "The sources would be two fold."

"Firstly, they could involve deteriorations in the government's general debt metrics and its access to external liquidity, given intensified commodity price shocks and an inadequate fiscal response," says Mitra.

"Secondly, such pressures could be due to the rising risk of fiscal spillovers to India's external accounts; such spillovers, if large enough, could weaken the case for the two-notch gap between its foreign currency and local currency ratings," says Mitra.