Moody’s retains India’s credit rating at ‘Baa3 stable’, says the economy is ‘diversified with high growth potential’

• Ratings agency Moody’s retained India’s sovereign credit rating at ‘Baa3 stable’.
  
• The agency cited ‘diversified economy with high growth potential’ as one of the reasons behind its decision to retain the ‘Baa3 stable’ rating.
  
• Overall, Moody’s maintained a positive outlook, saying external risk factors are unlikely to derail India’s ongoing economic recovery.
  

Ratings agency Moody’s retained India’s sovereign credit rating at ‘Baa3 stable’, calling it a diversified economy with high growth potential. Moody’s also said that the Russia-Ukraine war was unlikely to derail India’s ongoing economic recovery.

“The credit profile of India reflects key strengths, including its large and diversified economy with high growth potential, a relatively strong external position, and a stable domestic financing base for government debt,” Moody’s said in its latest report.

Moody’s stated that India’s external position remains strong, despite the RBI spending billions of dollars from its forex reserves to keep the Rupee stable.

The Reserve Bank of India spent over $72 billion in 2022 alone in firefighting and saving the Rupee. So far, the Rupee has held its own relatively, while almost all other major currencies have seen a bigger decline against the US Dollar.

Against the top five currencies, the Rupee has lost value only against the US Dollar. Note that the positive performance in the table below indicates that the foreign currency became more expensive, while a negative change means the respective foreign currency became cheaper.


Source: Morningstar, as on Sept 6, 2022

‘Risks from negative feedback between economy and financial system receding’

Moody’s also added that the higher capital buffers and greater liquidity in the country’s financial system have helped the recovery from the pandemic shock.

“While risks stemming from a high debt burden and weak debt affordability remain, we expect that the economic environment will allow for a gradual narrowing in the general government fiscal deficit over the next few years, avoiding further deterioration in the sovereign credit profile,” the agency said in its report.

These factors could lead to an upgrade

Going forward, the Indian government has its task cut out if it wants its sovereign credit rating to improve. According to the report, a material improvement in India’s growth potential, combined with effective implementation of fiscal policy measures will determine if the credit rating will be upgraded.

“The very large domestic market has provided strong demand-driven growth, helping to shelter the economy from fluctuations in external demand,” the agency said, suggesting that demand concerns have eased now.

Further, it added that the banking sector outlook is positive, with both asset quality and profits expected to improve. “Capital ratios have risen across both public and private banks over the past year, reflecting their ability to raise equity from capital markets, but will moderately decline as loan growth accelerates,” the agency added.

On the other end of the spectrum, an economic slowdown combined with an increase in the debt burden could lead to a downgrade in India’s credit rating.

Why is sovereign credit rating important?

Sovereign credit ratings are important for a country like India which has a significant exposure to foreign investments. These foreign investors tend to rely on sovereign credit ratings to make their investment decisions.

A ratings upgrade can bring more foreign investments in the country, while a downgrade can prompt a selloff.

Apart from attracting foreign investments, a high sovereign credit rating can help reduce the borrowing costs for the government and corporate entities trying to raise funds via bonds and external commercial borrowings.

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