India is facing various factors that may shake its sovereign credit metrics but strong economic growth rate and external balance sheet are expected to neutralise 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 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-' in 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.
‘Treacherous global environment’
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 US-based agency said.
S&P forecasts Indian economic growth to slow to 7.3 per cent in the current fiscal, from 8.7 per cent last year. India's central bank RBI expects economic growth this fiscal to be at 7 per cent. "Under more severe conditions though, a few factors could have the potential to apply downward pressure on our sovereign credit ratings on India," Wood added.
The fall in its foreign exchange reserves to around $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 per cent of GDP in the current fiscal year, from 1.6 per cent of GDP in the 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 hurt India's economic performance in fiscal 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," Wood said.
Fiscal 2026 forecasts
S&P forecasts India's economic growth between 6.5-7.3 per cent 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 the current fiscal citing slowdown in the global economy, and the 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 per cent, IMF has trimmed it to 6.8 per cent from 7.4 per cent. Asian Development Bank too has cut projections to 7 per cent, from 7.5 per cent 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 per cent… We retain our forecast for inflation to average 6.8 per cent in fiscal 2023, before falling to 5 per cent in fiscal 2024 and 4.5 per cent per year beyond that," S&P added.