The decision to change the outlook to stable reflects Moody’s view that the downside risks from negative feedback between the real economy and financial system are receding
Moody’s rating action has been fickle in the recent past, with four rating actions in the last five years.
India on Tuesday had its sovereign credit rating outlook revised to stable from negative by Moody’s Investors Service, on receding risks posed by the financial sector to the overall economy.
The country’s credit rating was, however, unchanged at Baa3, the lowest investment grade.
“The decision to change the outlook to stable reflects Moody’s view that the downside risks from negative feedback between the real economy and financial system are receding. With higher capital cushions and greater liquidity, banks and non-bank financial institutions pose a much lesser risk to the sovereign than Moody’s previously anticipated,” the rating agency said in a statement
While risks from a high debt burden and weak debt affordability remain, Moody’s expects the economic environment to allow for a gradual reduction of the fiscal deficit over the next few years, preventing a deterioration of the sovereign credit profile.
K.V. Subramanian, chief economic adviser in the finance ministry, said the outlook upgrade acknowledged the government’s assessment that the fundamentals of the Indian economy are strong.
“They have mentioned that the change in outlook stems from lower risks from the financial sector and its impact on the real economy. This is crucial because the slowdown in growth pre-pandemic itself was because of the financial sector. With several reforms having been implemented in the financial sector and the prospects for the sector looking better, there is ample scope for further re-calibration in their assessments,” he added.
