S&P Global, on Tuesday, affirmed ‘BBB-’ sovereign rating for India with stable outlook for the fourteenth year in a row.

‘BBB-’ is last investment grade rating. It implies adequate capacity to meet financial commitments, but more subject to adverse economic conditions. Stable outlook refers to the expectation that India’s economy will recover following the resolution of the Covid-19 pandemic, Also, the expectation is that strong external settings will act as a buffer against financial strains despite elevated government funding needs over the next 24 months.

S&P cuts India's FY22 growth forecast to 9.5%

Ratings by global agencies play a key role in decision making by foreign investors. S&P’s rating is slightly different from that of two other majors — Fitch and Moody’s. While ratings are same, outlooks are different. In April this year, Fitch retained India’s rating at ‘BBB-’ with a negative outlook. Last year, Moody’s downgraded India’s rating to ‘Baa3’, but maintained a negative outlook.

Vaccination factor

In its latest rating commentary, S&P said that the pace of India’s ambitious Covid-19 vaccination campaign will be crucial to the mitigation of adverse outcomes from future pandemic waves. The nationwide roll-out has picked up pace over the past month, helped by increasing domestic supply. “India is among a small group of emerging markets with extensive domestic vaccine manufacturing capabilities. Nevertheless, officials face stout challenges in establishing broad-based coverage for the nation’s large population, the majority of which live in rural areas,” it said.

India’s rating may not change for next 2 years: S&P Global Ratings

It stated that India’s severe Covid second wave, which appears to have peaked in May 2021, has undermined the healthy recovery momentum observed in the economy from September 2020 through March 2021. During that period, high-frequency economic indicators, financial sector data, infrastructure capacity utilisation, mobility, and the Goods and Services Tax (GST) receipts all showed strong signs of recovery, exhibiting the economy’s potential when pandemic-related restrictions are lifted.

“If the second wave of Covid-19 continues to abate, we expect India’s economic buoyancy to return, and that increased mobility and pent-up demand will power a strong recovery in the second half of the current fiscal year. These near-term prospects remain contingent upon the prevention of further severe epidemic waves, which are highly unpredictable,” it said.

Performance against peers

According to the global firm, while India’s economy continues to outperform peers at a similar level of income on a 10-year weighted average real GDP per capita basis, its performance on this metric has weakened somewhat. “Prior to the onset of the Covid-19 pandemic, the Indian economy had already slowed measurably, we expect economic activity in India to begin to normalise throughout the remainder of fiscal 2022 (2021-22), resulting in real GDP growth of about 9.5 per cent. A significant proportion of this rebound will be due to the very weak base in the prior fiscal year, when the economy contracted by a record 7.3 per cent,” it said.