Days after Moody’s downgraded India’s sovereign credit rating to its lowest investment grade, another rating agency Standard & Poor’s Global (S&P) has reaffirmed its 'BBB-' long-term sovereign credit ratings on India with a stable outlook.
Days after Moody’s downgraded India’s sovereign credit rating to its lowest investment grade, another rating agency Standard & Poor’s Global (S&P) has reaffirmed its ‘BBB-‘ long-term sovereign credit ratings on India with a stable outlook. S&P Global said that although risks to India’s long-term growth rate are rising, ongoing economic reforms, if executed well, should keep the country’s growth rate ahead of peers. A ‘BBB-’ rating is the lowest investment-grade rating on the rating agency’s scale that hints that the entity has adequate capacity to meet financial commitments, but is more subject to adverse economic conditions. India also has a BBB- rating from Fitch Ratings.
“The economic hit from COVID-19 will exacerbate India’s weak fiscal settings. We expect a materially larger fiscal deficit this year, followed by consolidation over the next three years,” S&P Global said. With a ‘A-3’ short-term foreign and local currency sovereign credit ratings on India, S&P Global’s stable outlook reflects its view that India’s economy, and fiscal position, will stabilize and begin to recover from 2021 onwards. The rating, S&P Global said reflects India’s above-average real GDP growth, sound external profile, and evolving monetary settings. “India’s strong democratic institutions promote policy stability and compromise, and also underpin the ratings,” it said. In the rating action India’s strengths have been balanced against the vulnerabilities stemming from the country’s low per capita income.
S&P Global is likely to watch the implementation of recent reforms and attempts at fiscal consolidation in the coming years. “In its ratings affirmation, S&P has said that it expects the recent reforms to continue and that fiscal consolidation is likely after FY21. India should deliver on that. In the context of S&P’s rating affirmation, is not likely to further downgrade India’s rating,” said Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
As an aftermath of the coronavirus pandemic, India’s real GDP growth is expected to decline by 5% in the current fiscal year. Although India’s economic growth outlook remains strong, S&P Global has expressed worries over the low per capita income. “India’s economy faces stark challenges in the near-term. However, we believe the country’s long-term outperformance will remain intact,” S&P said. Although the fiscal deficit is expected to shoot up, nudged by the government’s response to the pandemic, the government’s ability to consolidate its finances once the economy begins to recover will be key in determining the sustainability of India’s debt stock.
Real-GDP growth, after declining 5% in the month of May, is expected to shoot up, growing 8.5% in 2021. Earlier this month, Moody’s downgraded India to Baa3 with a negative outlook saying that the country’s policymaking institutions will be challenged in enacting and implementing policies which effectively mitigate the risks of a sustained period of relatively low growth. India’s fiscal deficit widened to 4.59% of gross domestic product for the financial year 2019-20, going beyond the government’s revised target of 3.8%, according to the official data released last month.