India facing ‘cacophony of factors’ that may shake sovereign-credit metrics: S&P

S&P said a deeper global economic slowdown than currently anticipated could have an adverse impact on India's economic performance in fiscals 2023 and 2024

October 13, 2022 01:00 am | Updated 01:00 am IST - New Delhi

Image for representation purpose only.

Image for representation purpose only. | Photo Credit: C. Venkatachalapathy

India is facing various factors that may shake its sovereign-credit metrics but strong economic growth rate and external balance sheet are expected to neutralize the risks inherent in the global environment, S&P Global Ratings said on Wednesday.

In a credit FAQ titled 'Can India Sovereign Ratings Withstand The Global Sputter', S&P said despite India's strong external balance sheet, it has not been able to escape the difficult landscape the rest of its emerging market peers have faced over the course of the year and 'more severe conditions', could apply downward pressure on India's sovereign credit ratings.

S&P has the lowest investment grade rating of 'BBB-' on India with a stable outlook.

"India is facing a mixture of factors that may shake its sovereign credit metrics. Amid external turbulence, its foreign exchange reserves are falling, and its current account deficit is rising. Meanwhile, the economy is battling faster inflation and tightening financial conditions both at home and globally," S&P Global Ratings sovereign analyst Andrew Wood said.

India's strong economic growth rate has long been an important counterbalance to its high fiscal deficits and debt burdens, and its sound external balance sheet helps to buffer against global market turbulence.

"We expect these strengths to help neutralise the risks inherent in the treacherous global environment," the U.S.-based agency said.

S&P forecasts Indian economic growth to slow to 7.3% in current fiscal, from 8.7% last year. India's central bank RBI expects economic growth this fiscal to be at 7%.

"Under more severe conditions though, a few factors could have the potential to apply downward pressure on our sovereign credit ratings on India," Mr. Wood added.

The fall in its foreign exchange reserves to about $533 billion currently, from a peak of about $634 billion in 2021, is driven in part by India's growing current account deficit, it said as it forecast CAD to jump to 3% of GDP in the current fiscal year, from 1.6% of GDP in fiscal year ended March 2022, on surging import bill.

India is, however, likely to continue benefiting from the active use of its currency in international transactions and the government's ability to fund itself via deep local currency debt markets.

S&P said a deeper global economic slowdown than currently anticipated could have an adverse impact on India's economic performance in fiscals 2023 and 2024.

Potential channels of risk for India include tighter global monetary conditions, prolonged high inflation, and poor investment or consumer sentiment both at home and abroad.

"In our view, India's economy is unlikely to downshift for an extended time on this basis alone, especially given its predominantly domestic orientation. Still, in the event of a prolonged downturn in real and nominal GDP growth, material downward pressure on the sovereign ratings could emerge, especially if large government deficits are left unchecked," Mr. Wood said.

S&P forecasts India's economic growth between 6.5-7.3% through fiscal 2026.

The International Monetary Fund (IMF) had last week warned of a darker global outlook, saying that the Russian invasion of Ukraine that began in February, has dramatically changed IMF's outlook on the economy.

"The risks of recession are rising," IMF Managing Director Kristalina Georgieva had said.

A host of agencies have slashed India's economic growth projections for current fiscal citing slowdown in global economy, Russia-Ukraine war, besides rising interest rates and inflation domestically.

While the World Bank too has pared its growth estimate for India by 100 basis points to 6.5%, IMF has trimmed it to 6.8% from 7.4%. Asian Development Bank too has cut projections to 7%, from 7.5% earlier.

On inflation S&P said, the external trends are fuelling higher consumer price inflation and interest rates in India and this trend would continue until March 2023.

"We expect the RBI's policy rate to end fiscal 2023 at 5.9%… We retain our forecast for inflation to average 6.8% in fiscal 2023, before falling to 5% in fiscal 2024 and 4.5% per year beyond that," S&P added.

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