Fiscal policies, structural reforms to determine India's sovereign credit profile : Moody's

26 Feb 2015 Evaluate

Global rating agency Moody's, in its report clarified that fiscal policies and structural reforms will determine India's sovereign credit profile and not recent revisions to the economic growth data. Although, it acknowledged that upward revision in India's economic growth highlight strength of economy, but at the same time clarified on the little impact this had on overall assessment of the credit profile since this did not change ratios for government finances, private external leverage and bank asset quality, all of which continued to pose sovereign credit risks. India's GDP growth in the fiscal year ended March 2014 is estimated at 6.9% under the new methodology, from 5% earlier.

In a report titled 'GDP Revisions underscore economic strength, but are credit neutral’, Moody's underscored that fiscal and structural reform policies would determine the extent to which accelerating growth could buttress the sovereign credit profile. It also noted that declining inflation called for a policy rate cut to boost investments.

It cautioned that India's wide fiscal deficits, poor infrastructure and regulatory complexity have combined creating a mismatch between domestic demand and supply, thereby contributing to inflation and current account pressures. The global rating agency, further warned that absence of government action to reduce fiscal deficits and structural supply constraints, a pick-up in domestic demand or rebound in global commodity prices could lead to renewed inflation and current account pressures over a three to five year horizon.

Notably, these comments come on heels of another rating agency Standard & Poor's warning that India’s weak fiscal and debt indicators coupled with low income levels could “constrain” the sovereign rating.

Rating agencies are keenly awaiting the 2015-16 Budgets to assess the government's commitment to fiscal consolidation and the direction of reforms. The government expects an upgrade in sovereign ratings from the near junk levels now due to reforms unleashed and economy's potential for faster growth.

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