The slowdown is unlikely to be a permanent feature of the country’s economy

Ushering in positive sentiments in an otherwise despondent economic environment, global rating agency Moody’s, on Monday, retained India’s credit rating outlook at ‘stable’ as it viewed that the current slowdown was unlikely to be a permanent feature of the country’s economy.

Unlike its peers such as Standard & Poor’s and Fitch, which lowered the outlook to ‘negative’ and threatened to downgrade the sovereign credit rating to ‘speculative’ from ‘investment’ grade on account of deteriorating growth prospects and the government’s inertia on the reforms front, Moody's Investors Service chose to maintain its stable outlook on India's current ‘Baa3’ rating.

Giving reasons for the positive stance on India in its newly released ‘Frequently asked questions about India's sovereign rating’, Moody’s stated that “various credit challenges — such as weak fiscal performance, tendency towards inflation and an uncertain investment policy environment — have characterised the Indian economy for decades, and are already incorporated into the current Baa3 rating.”

On the other hand, the rating agency noted that certain recent negative trends such as lower growth, slowing investment and poor business sentiment were “unlikely to become permanent or even medium-term features of the Indian economy, although Moody's expects that global and domestic factors, including potential shocks in agriculture, could keep India’s growth below trend for the next few quarters.”

Moreover, the agency statement pointed out that its ratings “express a view on medium-term sovereign creditworthiness and do not generally change with fluctuations in growth-related to the direction of the business cycle at a particular point, if Moody's believes growth will recover and sustain over time.”

Besides, it viewed that the “impact of lower growth and still-high inflation will deteriorate credit metrics in the near term, but not to the extent that they will become incompatible with India's current rating.”

Commenting on Moody’s rating outlook stance, Prime Minister's Economic Advisory Council Chairman C. Ranagarajan said: “Well, I think it’s good that Moody's has affirmed the stable grade. It also shows that the Indian economy is right on the track.”

In its assessment of India's budget deficits, Moody’s has pointed out that the country’s government debt and fiscal deficit ratios have always been worse than those of similarly-rated peers while noting that its own assessment of low government financial strength is based not merely on a comparison of ratios, but also on the underlying reasons for weak government finances.

“These lie in the role fiscal policy plays in maintaining social stability in a highly diverse, poor and unequal society, which limits government revenues and imposes demands on government expenditure. This poverty constraint is effectively factored into the rating by assigning India a 'moderate' economic strength assessment, despite the well above global average size and growth rates of its economy,” it said.

On the more current issue of rupee depreciation, Moody’s has maintained that as the government’s foreign currency debt comprises only 5.3 per cent of its total debt and is equivalent to 3.8 per cent of the GDP (gross domestic product), “the rupee’s decline does not raise the government’s own debt service burden significantly, especially since most of its foreign currency debt is owed to multilateral and bilateral creditors with low annual repayment requirements.”

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