Oil risks rise, but Moody's sees India holding firm

Moody's Ratings does not expect higher oil prices or a wider fiscal deficit to threaten India's investment-grade rating this year. The agency said India can absorb temporary budget pressure from energy costs as long as the government continues to bring down the deficit over time.

India is rated Baa3 by Moody's, the lowest investment-grade level, with a stable outlook. Christian de Guzman, Singapore-based senior vice president at Moody's Ratings, said the rating is supported by the government's fiscal repair since the Covid-19 pandemic.

“We don’t see India as being particularly affected because this shock is largely negative for most sovereigns,” Bloomberg quoted Christian de Guzman, Singapore-based senior vice president at Moody’s Ratings, as saying in an interview.

Deficit path still matters

The Centre has projected the fiscal deficit to fall to 4.3% of GDP by March 2027, sharply lower than the record 9.2% seen in fiscal 2021.

Bloomberg News reported earlier this month that policymakers were preparing for the deficit to widen by up to 50 basis points to 4.8% of GDP in the current financial year ending March 2027. De Guzman did not say what level of fiscal slippage Moody's would still view as consistent with India's rating.

He said Moody's remains confident that New Delhi will follow a conservative path on deficit reduction.

Oil shock may be temporary

The fiscal debate has sharpened because of crude oil prices. A rise in oil prices can increase India's import bill, push up inflation and add pressure on subsidies.

Oil prices have eased in recent weeks as US-Iran peace talks progressed. Some policymakers believe a lasting fall in tensions in the Middle East could help India's outlook.

Nagesh Kumar, an external member of the Reserve Bank of India's Monetary Policy Committee, told Bloomberg last week, “the economy could grow by more than 7% this year if global crude prices remain around $70 a barrel.”

Moody's has kept its India growth forecast at 6% for the year through March 2027. Its forecast assumes oil prices will average above $95 a barrel in 2026. De Guzman said Moody's expects disruptions to shipping through the Strait of Hormuz to continue into autumn despite recent progress in US-Iran talks.

Debt costs remain the weak spot

Moody's said India's biggest credit weakness is not only the fiscal deficit, but the cost of servicing debt.

“Debt affordability for India is materially worse than all other investment-grade countries,” de Guzman said.

The agency expects interest payments to use up about 23% of central and state government revenue this year. For similarly rated sovereigns such as Italy, Oman, Mexico and Greece, the median is less than 10%.