Moody’s affirms India’s Baa3 rating with stable outlook

Moody’s Investor Service Friday affirmed India’s 'Baa3' rating with a stable outlook. The ratings agency said that rising growth will contribute to higher income levels and overall economic resilience. It also noted that India is likely to grow faster than other major economies, even if potential growth for the country has come down to 6-6.5% over the past 7-10 years, compared to 7% in the middle of the last decade.

“Moody's expects India's economic growth to outpace all other G20 economies through at least the next two years, driven by domestic demand,” the rating agency said in justification of affirmation of India’s rating.

The agency also lauded the government’s efforts on infrastructure, which it noted, had led to improvements in logistic performance and quality of trade and transport-related infrastructure.


This coupled with investments in digital public infrastructure had boosted formalisation of economy and broadened the tax base.

“Moody's expects that the economic benefits of the DPI will materialise over time and support India's growth potential,” the agency pointed further stating that “the economic and social benefits of digitalisation could be larger than currently assumed by Moody's.”

It said that constraints on delivering significant improvement in manufacturing and job creation could limit potential growth.

“The curtailment of civil society and political dissent, compounded by rising sectarian tensions, support a weaker assessment of political risk and the quality of institutions,” Moody’s noted, pointing to the Manipur incident.

The rating agency also cautioned against rising inflation as a threat to the outlook.

“Upside risks to inflation and correspondingly higher interest rates could challenge efforts to rein in spending and exacerbate already weak debt affordability,” it pointed.

India’s inflation rose higher than expected to 7.4% in July on account of vegetable price shock. Experts point that inflation is likely to be higher than RBI’s target band of 2-6% in August as well.

While Moody’s pointed that the fiscal strength of the country was a key weakness for its outlook and rating.

“Even as the narrowing fiscal deficit demonstrates ongoing government's commitment to longer-term fiscal sustainability, it remains wider than Baa-rated peers,” it stated, pointing that achieving the 4.5% fiscal deficit goal would be a challenge in FY25, given absence of any material gains in revenues.

India has set a fiscal deficit target of 5.9% in FY24.

Moody’s also pointed that India’s resilience to environmental and social risks was low, as weak balance sheet weigh on the country’s capacity to respond to such risks.

Climate-related risks are expected to worsen for India, according to World Bank.

While Moody’s noted that an improvement in fiscal consolidation and debt affordability could lead to an upgrade, “an escalation of political tensions and/or a further weakening of checks and balances that would undermine India's long-term growth potential” along with resurgence of financial sector stress could contribute to a downgrade.

Steady ratings, stable outlook
-Growth prospects a big factor in affirmation of rating

-Physical and digital public infrastructure investments bearing fruit

-Inflation remains a constraint

-So do rising political tensions