The Telegraph
Wednesday , November 28 , 2012
Since 1st March, 1999
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Moody’s status quo offers relief

Mumbai, Nov. 27: Moody’s, the global credit rating agency, today retained a stable outlook for India but warned that the country’s investment-grade sovereign rating was constrained by a high fiscal deficit and debt ratios.

Inflationary pressures and an uncertain operating environment exacerbated the situation.

Moody’s reiteration of the stable outlook comes as a relief as apprehensions remain that international credit rating agencies may downgrade India amid indications that the reforms process may be stalled because of the legislative gridlock and fears that the fiscal deficit could overshoot the targeted 5.3 per cent this year.

In the past, Standard & Poor’s (S&P) has warned that India’s investment-grade rating could be cut to “junk” or speculative grade status. Both S&P and its peer, Fitch Ratings, have a negative outlook on India.

In its annual credit analysis on India, Moody’s said the Baa3 sovereign rating was supported by credit strengths which include a large, diverse economy, strong GDP growth as well as savings, and investment rates that exceed emerging market averages.

The report summarises India’s sovereign credit profile on the basis of four broad factors that forms its sovereign bond ratings methodology: economic strength, institutional strength, government financial strength, and susceptibility to event risk.

Moody’s said India’s rating was based on an assessment of moderate economic and institutional strength, low government financial strength and low susceptibility to event risk.

The report said that though India’s GDP growth remained above that of its rating peers, it had slowed from about 8.4 per cent in 2009-10 and 2010-11 to 5.3 per cent in the first half of 2012.

“Persistent domestic inflation and wide fiscal deficits precluded domestic policy loosening to combat the global growth downturn over the last year,” the rating agency averred.

In September, the Centre had announced a slew of measures to spur infrastructure development, relax sectoral caps on foreign investment, and rein in the fiscal deficit.

However, Moody’s said that given the delayed timing and modest scope of these measures, growth might remain subdued in the near term amid continued domestic political uncertainty and a global slowdown.

The rating agency warned that India’s fiscal position had been a constraint on its rating and that the government’s annual deficits tended to be among the highest within the Baa range. Moreover, it has proven relatively more vulnerable to growth downturns because of elastic revenues and rigid expenditures.

Moody’s said the stable outlook was based on an expectation that the economy’s structural strengths — a high household savings rate and relatively competitive private sector — would ultimately raise the GDP growth rate from around 5.4 per cent in this fiscal to 6 per cent or higher in next year. A surge in GDP growth would also improve fiscal and balance of payments metrics.

However, Moody’s cautioned that unanticipated domestic political turmoil, a further worsening in global growth and financial conditions, or a surge in food and other commodity prices could affect the pace and timing of the recovery.