Moody's warns of ratings downgrade

Global ratings agency Moody's on Thursday cautioned that there could be downward pressure on India's sovereign rating if growth weakens further and high inflation persists

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The ratings agency expects a "slow" recovery in India's economic growth in the second half of 2014 provided the global economy recovers and while domestic inflation and interest rate decline.

"Downward pressure on the rating could develop if the medium-term growth and fiscal outlook weakens further or there is a material decline in foreign exchange reserve coverage of external debt and imports," Moody's Investors Service said in a report.

Also a persistent high inflation affecting growth and government finances could have a downward pressure on the country's rating.

On the other hand, it said, upward pressure on the rating would develop if fiscal metrics and competitiveness indicators improved to levels comparable to its peers.

Moody's has assigned a Baa3 rating (investment grade) to India with a stable outlook.
"The outcome of national elections next year could affect growth, depending on how it impacts sentiment and policies," it added.

The economic growth in the first half of the fiscal stood at 4.6 per cent. The government expects economy to recover in the second half and achieve a growth rate of 5 per cent for the entire fiscal.

Inflation remains a cause of concern as food prices continue to rule high. The retail inflation swelled to 10.09 per cent, while WPI was 7 per cent in October.

India's Baa3 government bond rating, it said, reflects the sovereign credit support derived from a large and diverse economy, high domestic savings, and adequate foreign exchange reserves as well as the challenges posed by large fiscal deficits, recurrent inflation and weak infrastructure.

"The rating agency's report serves as an update to the markets and is not a rating action," it added.

"Moreover, India's investment climate and competitiveness indicators are weaker than those of similarly rated countries," it said while adding there have been policy efforts to induce investment in the last year, their impact may not be evident in the near term.

Challenges for India 

Reflecting macroeconomic challenges over the next 12 months, Moody's expects challenges for Indian non-financial corporates to continue in 2014.

"India's GDP growth to remain weak at 5.5 per cent in the fiscal year ending March 2015, as elections in mid-2014 will delay reforms needed to revive the economy," the Moody's report said.

Companies will also face higher borrowing costs and tight funding conditions with monetary policy likely to remain tight, it said.

Moody's could move to a stable outlook if its GDP growth expectations exceed 6 per cent, the rupee stabilises -- such that one-year volatility falls below 5 per cent -- and a development and reform-focused government is formed with a strong majority, it said.