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Moody’s revises India’s rating outlook to stable from negative

Ratings agency Moody’s affirmed India’s sovereign rating and upgraded the country’s outlook to ‘stable’ from ‘negative’ on Tuesday.

The current sovereign rating by Moody’s stands at ‘Baa3’, which is an elevation from ‘Baa2’, indicating a relatively positive sign for the economy, with Moodys citing an upturn in the financial sector and a speedier economic recovery across sectors than expected.

Baa3 is the lowest investment grade, which stands exactly above the junk bond status, which is depicted by Baa2.

Moody’s Report

As elaborated in a report by Moody’s on October 5th, “The decision to change the outlook to stable reflects Moody’s view that the downside risks from negative feedback between the real economy and financial system are receding,”

Furthermore, in the changed outlook, it expects the economic environment to allow for a gradual decrease in the general government fiscal deficit over the succeeding few years, in line with preventing further deterioration of the sovereign credit profile, even though the risks attributing from a high debt burden and weak debt affordability stayed.

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“With higher capital cushions and greater liquidity, banks and non-bank financial institutions pose a much lesser risk to the sovereign than Moody’s previously anticipated,” as continued in the report.

The budget articulated the Centre’s fiscal deficit in the period April-July 2021 amounted to only 21.3 per cent of the full-year budget estimate (BE), primarily attributed to curbs on expenditure and an increase in tax and non-tax revenue collection. In comparison with last year, the deficit stood at 103 per cent of the annual target.

In accordance with its Budget estimates, the Centre had declared it would borrow a sum of Rs 5.03 lakh crore in the period of October-March. The 2021-2022 Budget citied that the government would peg its gross borrowing target for the current fiscal at Rs 12.5 lakh crore.

November 2019 marked the day when Moody’s had downgraded India’s sovereign rating down to Baa3 from Baa2 with a negative outlook over a staggering reform push contributing to a prolonged period of staggering growth that was expected to continue to post the Covid-19 pandemic.

The Indian economy fell by 7.3 per cent in the fiscal year 2020-21. Following that, in the April-June quarter of the current fiscal, the economy grew 20.1 per cent. For the current fiscal ending March 2022Moody’s has projected a 9.3 per cent growth. However for the calendar year 2021, Moody’s has reduced the growth estimate significantly to 9.6 per cent.


Expected Recovery in economy

The rating agency observed that solvency in the financial system had been strengthened, with improving credit conditions that are expected to be sustainable as policy settings normalize.

In support of the optimism of economic recovery, the report also stated that “In addition, banks had strengthened their capital positions, indicating to a stronger outlook for credit growth to support the economy,”
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“Following a deep contraction of 7.3 percent in FY2020-21, Moody’s expects India’s real GDP to supersede 2019 levels this fiscal year, rebounding to a growth rate of 9.3 percent, followed by 7.9 percent in fiscal 2022.”, was stated by Moody’s along with claiming that the downside risks to growth from succeeding coronavirus infection waves were lessened by rising vaccination rates and more selective imposing of restrictions on economic activity, as observed during the second wave.


Betterment of Credit Conditions

“Solvency in the financial system has marginally strengthened, improving credit conditions which we expect to be sustained as policy settings normalize. Bank provisioning has a permit for the gradual write-off of legacy problem assets over the past few years,” the report said, adding that banks have strengthened their capital positions, indicating a stronger approach for credit growth in order to support the economy.

The report continued by stating “The growth projections take into account structural challenges, including weak infrastructure, rigidities in labour, land and product markets that continue to constrain private investment and contribute to post-pandemic economic scarring,”

credit conditions to weaken in 2019 – moody's | pensions & investments

It also said that the government proclaimed the various economic relief measures and a speedy vaccine drive over the former year and a half. If implemented appropriately, it would be credit positive and could lead to higher potential growth than previously expected.

The agency had upgraded India in the year 2017 after a period of 14 years, in a positive response to the policy review agenda under the Narendra Modi government. It quoted weak reform push for the downgrade. It had altered the outlook on the rating to negative in November 2019, after which it restarted it today, after two years.

Moody’s Investors Service, often cited as Moody’s, is the bond credit rating business incorporated under Moody’s Corporation, symbolizing the company’s traditional line of business and its historical name. Moody’s Investors Service provides worldwide financial research on bonds issued by commercial and government entities.

Moody’s, along with Standard & Poor’s and Fitch Group, is regarded as one of the Big Three credit rating agencies and is also a part of the Fortune 500 list of 2021

Edited by Sanjana Simlai.

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