Rating agency Moody’s has affirmed India’s sovereign rating at BAA3, but raised the rating outlook to ‘positive’ from ‘stable’.
However it cautioned that unless the country’s banking system woes were resolved, its credit profile would remain constrained.
Moody’s view is that India’s policymakers are establishing a framework that will likely allow India’s growth to continue to outperform that of its peers over medium term and improve India’s macro economic, infra and institutional profile.
The rating agency said there was increasing probability that actions by policy makers will enhance the country’s economic strength, and by extension, the sovereign’s financial strength over coming years.
The rating incorporates credit strengths such as diversified economy, robust growth prospects, relatively high domestic savings rate, high international reserve buffers.
It also reflects India’s weaker performance relative to peers on fiscal, inflation and infrastructure related metrics.
“While policies are beginning to address each of these factors, the extent of likely improvement is as yet unclear,” said the Moody’s release, adding that India’s banking system’s asset quality, loan loss coverage and capital ratios were relatively weak
“This poses sovereign credit risks because of banking sector’s role in financing growth as well the government’s deficit through its purchase of government securities and the contingent liabilities due to government’s ownership of a major portion of banking sector,” the release said.
Excerpts from the Moody’s release:
“The Baa3 rating incorporates the risk that higher levels of growth and infrastructure development will be accompanied by higher leverage.
Sovereign credit improvements over the next 12-18 months will depend on the extent to which growth, policies and buffers can contain the risks associated with rising leverage.
Moody’s believes that recent measures to address inflation, keep external balances in check, simplify the regulatory regime for investors, increase foreign direct investment, and facilitate infrastructure development will reduce some of India’s sovereign credit constraints.
Many of these measures are at relatively early stages of design and have yet to be implemented. According to Moody’s, the ability of policymakers to strengthen India’s sovereign credit profile to a level consistent with a higher rating will become apparent over the next 12-18 months.
WHAT COULD CHANGE THE RATING UP/DOWN:
Evidence over the coming months that policymakers are likely to be successful in their efforts to introduce growth-enhancing and growth-stabilizing economic and institutional reforms would lead to the rating being considered for an upgrade.
On the other hand, the rating outlook would be revised to stable if economic, fiscal and institutional strengthening appeared unlikely, or banking system metrics remained weak or balance of payments risks rose.”