Moody’s Upgrades India's Rating Outlook To Stable From Negative

Moody's upgraded India's sovereign credit rating outlook from negative to stable, citing improved financial conditions and a faster-than-expected economic recovery across sectors. It did, however, maintain the lowest investment-grade ratings for both foreign and domestic currencies.

India's sovereign rating was kept at 'Baa3' by the agency.

In a report released on October 5, Moody's noted, "The decision to modify the outlook to stable reflects Moody's belief that the downside risks from negative feedback between the real economy and financial system are diminishing."

"While concerns associated with a high debt load and low debt affordability persist, Moody's expects the economic climate to allow for a gradual decrease of the general government fiscal deficit over the next several years, limiting further deterioration of the sovereign credit profile," it added.

According to the rating agency, India's real GDP growth will average about 6% in the medium term, representing a return to potential activity as conditions normalise following the second wave of the Covid-19 outbreak.

"The growth predictions take into account structural constraints, such as deficient infrastructure, labour, land, and product market rigidities, which continue to impede private investment and contribute to post-pandemic economic scarring," it stated.

The ceiling on long-term local-currency (LC) bonds remains at A2, while the cap on long-term foreign-currency (FC) bonds stays at A3.

The four-notch gap between the LC ceiling and issuer rating reflects limited political event risk that would significantly disrupt the economy, as well as modest external imbalances, which are offset by the government's large economic footprint and limited predictability and reliability of government policies.

From April to August, India's fiscal deficit was $4.68 trillion, with August accounting for 31.1 percent of the planned forecast. Meanwhile, S&P Global Ratings predicted in May that India's sovereign rating will remain unchanged for the next two years.