Moody?s might have cut outlook for the country?s banking sector but there is no threat to the country?s sovereign ratings.
The government is likely to miss its fiscal deficit target for the current financial year, which is one of the important criteria that determine a country?s rating.
However, responding to queries from FE, Moody?s said the stable outlook for India?s rating would continue as the chances of the government missing its deficit target had already been taken into account.
The rating agency has assigned Baa3 rating to India?s foreign currency government bond rating, which is the lowest investment grade.
Besides, in 2010, Moody?s upgraded India?s sovereign local currency rating by a notch to Ba1 in the light of its commitment to reforms. However, the increase in the rating from Ba2 is still a notch below investment grade.
?We maintain a stable outlook on the government?s foreign currency bond rating as the likelihood of the government missing its fiscal target has already been incorporated into the rating,? said Atsi Sheth, Moody?s lead analyst for India.
Earlier this week, Moody?s downgraded the outlook for the Indian banking system to ?negative? from ?stable? amid an economic slowdown, which is affecting the asset quality, capitalisation and profitability.
However, differing with the downgrade accorded by Moody?s, ratings agency Standard & Poor?s on Thursday upgraded the Indian banking sector saying its domestic regulations were in line with international standards.
Moody?s will hold consultations with the finance ministry officials next week as part of the exercise to review the country?s sovereign rating.
However, the rating agency said that a ?meaningful medium term reduction? in annual fiscal deficits and successfully addressing infrastructure constraints would be positive for India?s rating.
The Union government will revise its fiscal deficit target, budgeted at 4.6% of GDP, as the slowing economy is putting severe constraints not only on tax mop-up but even the envisaged spending cuts.
Finance minister Pranab Mukherjee last month acknowledged that it would be a ?challenge? to narrow the government?s budget deficit.
The country?s fiscal deficit more than doubled in the first half of the current fiscal to R2,92,458 crore from a year ago and crossed 70% of the budgeted level for this year as revenue receipts dropped and disinvestment target remained unmet, while expenditure kept growing steadily.
Moody?s has said that in the short term it is monitoring the impact that a worsening global growth outlook, volatility in foreign capital flows and high domestic borrowing costs will have on India?s growth, balance of payments and fiscal performance.
Besides, over the medium term, the rating agency concerns are the limits that infrastructure constraints will place on output growth, and a continued high government debt burden.
