Credit ratings agency Standard & Poor's (S&P) on Wednesday retained India's sovereign rating at the "BBB-" - the lowest investment-grade level - with a stable outlook. The economic hit from the coronavirus pandemic will worsen the country's weak fiscal settings, however the stable outlook reflects the expectation that the country's' economy will recover following the containment of the COVID-19 pandemic, S&P said. The status quo on the country's rating and outlook comes days after another ratings agency, Moody's, downgraded its sovereign rating for India to a notch above junk citing challenges in implementation of policies to mitigate risks of a sustained period of low growth and deteriorating fiscal position.
While risks to the country's long-term growth rate are rising, ongoing economic reforms, if executed well, should keep its growth rate ahead of peers, S&P said in a statement. "We are affirming our 'BBB-' long-term and 'A-3' short-term foreign and local currency sovereign credit ratings on India," it added.
S&P further said it could upgrade the country's ratings if the government significantly curtails its fiscal deficits, resulting in materially lower net indebtedness at the general government level. Downside pressure on ratings would emerge from failure of GDP growth recovering meaningfully from 2021 onwards and also net government deficit levels sharply exceeding forecasts.
"We expect a materially larger fiscal deficit this year, followed by consolidation over the next three years... The stable outlook reflects our view that India's economy, and fiscal position, will stabilize and begin to recover from 2021 onwards," S&P said.
S&P expects the government's fiscal deficit to touch a multi-year high of 11 per cent of GDP in the current financial year, and assumes it will recede going forward. It expects the country's current account deficit to decline modestly this year, and to continue to improve over the forecast period.
Tighter lending conditions continue across the financial system, particularly in the public sector, according to S&P. This is reflected in a gradual decline in credit growth, which is likely to remain weak owing to subdued demand and limited risk appetite by the banks, it said.
S&P said that the liquidity concerns in some parts of the non-bank financial institution (NBFI) sector have also re-emerged since the onset of the COVID-19 crisis.
"Despite generally ample liquidity in the banking sector, credit extension to less creditworthy borrowers in the NBFI space may remain weak for some time owing to heightened prudence in banks' lending standards. Government measures aimed at backstopping NBFI debt should help to alleviate these conditions to some extent," S&P said.
The country's economy faces stark challenges in the near term, however its long-term outperformance is expected to remain intact, the global ratings agency added.