Leading rating agency 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 monetary authorities,” said Aninda Mitra, a vice president and 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.
“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 deterioration 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. Finally, the outlook for reform remains uncertain, even though the Congress Party-led administration has seen off its leftist partners and re-shuffled its coalition. The author notes that, “elections are due in less than a year’s time, and it is not clear whether the new coalition partners would support further reforms that could alleviate the country’s economic stresses.”