Global challenges including the impact of the Russia-Ukraine conflict, higher inflation and tightening global financial conditions are unlikely to derail economic recovery from the pandemic, rating agency Moody's said on Tuesday.
Moody's Investor Service retained its sovereign rating on India at Baa3 with a stable outlook, the agency said in a statement.
"The stable outlook reflects our view that the risks from negative feedback between the economy and financial system are receding," it said.
With higher capital buffers and greater liquidity, banks and non-bank financial institutions pose much less risk to the sovereign than previously anticipated, facilitating the ongoing recovery from the pandemic, it added.
Moody's said India's economy was expected to grow by 7.6% in real GDP terms in the current fiscal year that started on April 1, while growth was seen slowing to 6.3% in the next fiscal year.
The agency also projected the country's current account deficit (CAD) to widen to 3.9% of GDP in the current year, before narrowing to 3% in the following year.
The Reserve Bank of India has repeatedly said the country's CAD will be manageable in the current fiscal year. The full year CAD stood at 1.2% in the 2021/22 as compared to a surplus of 0.9% in 2020/21.
"Principal credit challenges include low per capita income, high general government debt, low debt affordability and limited government effectiveness," Moody's said.
"While risks stemming from a high debt burden and weak debt affordability remain, we expect that the economic environment will allow for a gradual narrowing in the general government fiscal deficit over the next few years, avoiding further deterioration in the sovereign credit profile," they wrote.
The agency said it expects only a gradual consolidation of the fiscal deficits between 2022/23 and 2024/25 and thus sees debt stabilising at around 80% to GDP - still significantly higher than similar rated peers which have a median of around 55%.