Moody’s retains India’s rating at Baa3, says inflation unlikely to derail economic recovery

It said that low per capita income and high government debt remain major challenges

Moody’s on Tuesday retained its sovereign rating on India at Baa3 with a stable outlook and said Russia-Ukraine conflict, higher inflation and tightening global financial conditions are unlikely to derail the country’s economic recovery from the pandemic.

It, however, said that low per capita income and high government debt remain major challenges.

“Principal credit challenges include low per capita income, high general government debt, low debt affordability and limited government effectiveness,” Moody’s said in a statement.

“The stable outlook reflects our view that the risks from negative feedback between the economy and financial system are receding.

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“With higher capital buffers and greater liquidity, banks and non-bank financial institutions pose much less risk to the sovereign than we previously anticipated, facilitating the ongoing recovery from the pandemic.

“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 rating agency said.

With that, it said it could upgrade the rating if India’s economic growth potential increased materially.

“Could upgrade the rating if India’s economic growth potential increased materially beyond our expectations, supported by effective implementation of economic and financial sector reforms that led to a significant and sustained pick up in private sector investment. Effective implementation of fiscal policy measures that resulted in sustained decline in the government’s debt burden and improvements in debt affordability would also support the credit profile,” Moody’s said.