S&P warns about India’s credit rating, warns of risks from global adversities

In a credit FAQ titled ‘Can India sovereign ratings with the global sputter’, S&P said despite India’s strong external balance sheetIt has not been able to survive the tough scenario its other emerging market peers have faced during the year and ‘more dire conditions’, could put downward pressure on India’s sovereign credit ratings.

With a stable outlook, S&P has the lowest investment grade rating of ‘BBB-‘ on India.

“India is facing a mix of factors that could shake up its sovereign credit metrics. Amidst external turmoil, its forex reserves are falling, and its current account deficit is widening. Meanwhile, the economy is rapidly inflationary. and tightening financial conditions at home and globally,” said Andrew Wood, Sovereign Analyst at S&P Global Ratings.

India’s strong economic growth has long been a key counterbalance to its high fiscal deficit and debt burden, and its strong external balance sheet helps buffer against turbulence in the global market.

“We expect these forces to help neutralize the risks inherent in a treacherous global environment,” the US-based agency said.

S&P has forecast 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 the economic growth rate to be 7 percent in the current financial year.

“While in more severe circumstances, certain factors may have the potential to put pressure on our sovereign credit rating on India,” Wood said.

The fall of about USD 533 billion in its foreign exchange reserves, from a peak of about USD 634 billion in 2021, is driven by India’s rising current account deficit, it said, adding that it expects a CAD to jump to 3 per cent of GDP. guesses. In the current fiscal, on a rising import bill, from 1.6 per cent of GDP in the financial year ending March 2022.

However, India is likely to benefit from the active use of its currency in international transactions and the government’s ability to fund itself through deep local currency debt markets.

S&P said a deeper global economic slowdown than currently anticipated could have an adverse impact on India’s economic performance in fiscal years 2023 and 2024.

Possible channels of risk for India include tighter global monetary conditions, prolonged high inflation, and poor investment or consumer sentiment at home and abroad.

“In our view, India’s economy is unlikely to downshift for an extended period of time on this basis alone, especially given its predominantly domestic orientation. Nevertheless, there is a prolonged decline in real and nominal GDP growth.” In this situation, sovereign ratings could face material downward pressure, especially if large government deficits are left unchecked,” Wood said.

S&P has projected India’s economic growth to be in the range of 6.5-7.3 per cent till FY2026.

The International Monetary Fund (IMF) last week warned of a darkened global outlook, saying the Russian invasion of Ukraine that began in February has dramatically changed the IMF’s outlook on the economy.

IMF Managing Director Kristalina Georgieva said, “The risk of recession is increasing.”

Several agencies have downgraded India’s economic growth projections for the current fiscal, citing slowdown in the global economy, Russia-Ukraine war as well as rising domestic interest rates and inflation.

While the World Bank has also lowered its growth forecast for India by 100 basis points to 6.5 per cent, the IMF has lowered it to 6.8 per cent from 7.4 per cent. The Asian Development Bank has also lowered estimates from 7.5 per cent to 7 per cent.

On inflation, S&P said, external trends are driving higher consumer price inflation and interest rates in India and this trend will continue till March 2023.

“We expect the RBI’s policy rate to end at 5.9 per cent in FY2023… We maintain our forecast for inflation at an average of 6.8 per cent in FY2023, before setting it up in FY2024. falling to 5 per cent and beyond to 4.5 per cent per annum.” S&P added.