In a bit of relief if not cheer, brokerage firm Morgan Stanley expects country’s sovereign rating to remain stable over the next twelve months period. However, the brokerage firm asserted that a decisive and timely action by the government to reduce the fiscal deficit through lower expenditure, moderate rural wage growth in line with productivity, and reduced energy subsidies would be required to trigger an upgrade.
India's sovereign is currently rated ‘BBB-‘by all rating agencies, barring S&P which has a negative outlook for India. While the rating agency has not detailed specific triggers for a downgrade, it is looking for stronger growth, fiscal account consolidation and lower inflation to revise the outlook to stable.
Meanwhile, to score well on Morgan Stanley forecast, the country needs to show considerable improvement in inflation, fiscal balance and current account deficit to potentially be upgraded.
Morgan Stanley expects India's inflation rate to be reduced to 6.5% over the next 12 months. While this is an improvement from the current level, it still compares unfavorably with the average of 4.8% for ‘BBB-rated’ EM sovereign and average of 2.6% for ‘A and above’ EM sovereign rated countries. Similarly, India's fiscal balance expectation of -6.4% of GDP by this fiscal compares unfavourably with EM sovereigns rated BBB (-1.9% of GDP) and A (-2.1% of GDP).
Additionally, the report by brokerage firm also underscored that the country could boost productivity and improves its sovereign rating by targeting factors like reducing inflation, cutting the fiscal deficit, and encouraging FDI inflows.
