Moody’s Investors Service, on Tuesday, retained India’s sovereign rating at Baa3 with a stable outlook and said that rising challenges to the global economy, including the impact of the Russia-Ukraine war, higher inflation and tightening financial conditions on the back of policy tightening are unlikely to derail the country’s ongoing recovery from the pandemic in 2022 and 2023.

“The credit profile of India reflects key strengths including its large and diversified economy with high growth potential, a relatively strong external position, and a stable domestic financing base for government debt,” it said on Tuesday.

The agency said the stable outlook reflects its view that the risks from negative feedback between the economy and financial system are receding.

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“With higher capital buffers and greater liquidity, banks and nonbank financial institutions (NBFIs) pose much less risk to the sovereign than we previously anticipated, facilitating the ongoing recovery from the pandemic,” it further said.

Gradual narrowing

While risks stemming from a high debt burden and weak debt affordability remain, it expects that the economic environment will allow for a gradual narrowing in the general government fiscal deficit over the next few years, avoiding further deterioration in the sovereign credit profile.

The agency has forecast real GDP growth at 7.6 per cent for the year ending March 2023.

“The downward revision assumes that higher inflation, rising interest rates, uneven distribution of monsoons, and slowing global growth will dampen economic momentum on a sequential basis,” it said.

GDP growth

GDP growth for 2023 is pegged at 6.3 per cent. CPI inflation is projected at 6.8 per cent in this fiscal and at 5 per cent next fiscal. It also expects the current account deficit to widen to 3.9 per cent of GDP in fiscal 2022 from 1.2 per cent in fiscal 2021.

“As such, we continue to see India as the fastest growing economy among its G20 peers in both 2022 and 2023,” it further said.

The agency, on September 1, had slashed India’s economic growth projection for 2022 to 7.7 per cent from its previous forecast of 8.8 per cent on the grounds that rising interest rates, uneven monsoon, and slowing global growth will dampen economic momentum on a sequential basis.

Moody’s said it could upgrade the rating if India’s economic growth potential increased materially beyond its expectations, supported by effective implementation of economic and financial sector reforms. that led to a significant and sustained pickup in private sector investment.

Weaker economic conditions

It also warned that weaker economic conditions than currently expected that pointed to lower growth over the medium term and/or a resurgence of financial sector risks would put downward pressure on the rating.

Significantly, the agency flagged India’s economy to be highly exposed to climate change risks.

“For example, monsoon rains are critical for the agricultural sector, given that almost half the country’s farm land is unirrigated,” it noted, adding that excessive use of groundwater – driven by rapid economic and population growth – and rising temperatures have contributed to significant water scarcity challenges.

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