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Mix of factors could shake India’s sovereign ratings: S&P Global

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  • In tougher economic conditions, a number of factors could put pressure on the BBB-/Stable/A-3 rating on government bonds. Indiaaccording to S&P Global Ratings.
  • The rating agency predicted that India’s current account deficit would rise to 3 percent of gross domestic product (GDP) this fiscal year, from 1.6 percent of GDP last year due to higher import bills.
  • At the same time, the rise in tariffs is driving up the cost of government financing.

India faces a mix of factors that could shake its sovereign credit statistics and amid external turbulence, foreign exchange reserves are on the decline as the current account deficit widens, S&P Global Ratings said on Wednesday.

In tougher economic conditions, a few factors could have the potential to put pressure on the BBB-/Stable/A-3 state ratings on India, according to S&P Global Ratings.

While the Indian economy is battling inflation and tighter financial conditions both domestically and globally, strong economic growth is counterbalancing high budget deficits and debt.

India’s solid external balance sheet is helping to cushion the turbulence in the global market, the report said.

The rating agency predicted that India’s current account deficit would rise to 3 percent of gross domestic product (GDP) this fiscal year, from 1.6 percent of GDP last year due to higher import bills.

According to S&P Global, current account pressures will gradually ease through 2026 if commodity prices stabilize at current levels until 2023 and then decline further.

Nevertheless, if the current account deficit remains higher for longer, compared to our current baseline scenarios, it would have an impact on India’s external balance sheet, the report notes.

While India is currently a modest net external creditor, it may return to a small net external debt position.

However, it is unlikely that this contingency alone will add material downward pressure to our sovereign ratings on India.

India is also likely to continue to benefit from the active use of its currency in international transactions and the government’s ability to fund itself through a deep local currency debt market, the report said.

expect the Reserve Bank of India‘s (RBI) policy rate to close fiscal year 2023 at 5.9 percent, the report said higher rates and faster price increases could dampen short-term growth momentum.

At the same time, the rise in tariffs is driving up the cost of government financing. So far this year, the government’s two-year government bond yields in the secondary market have risen about 230 basis points (bps) to about 7.3 percent, according to S&P Global.

A stress scenario assuming consumer price inflation and benchmark interest rates outperform our current longer-term projections by 300bps and 250bps, respectively, could put more pressure on sovereign ratings, the report said.

“We believe that a deeper global economic slowdown than we currently foresee could negatively impact India’s economic performance in fiscal years 2023 and 2024. Potential risk channels for India include tighter global monetary conditions, prolonged high inflation and poor investment or consumer confidence at home and abroad,” said S&P Global.

The rating agency also said that given the Indian economy is domestically oriented, a downturn will not take place for an extended period of time.

“Yet, in the event of a prolonged decline in real and nominal GDP growth, material downward pressure on sovereign ratings could develop, especially if large government deficits remain unchecked,” S&P Global said.

India’s government deficit averages well above 7 percent of GDP per year, and the debt burden is about 86 percent of GDP on a net basis. These statistics, along with the high interest burden, contribute to very weak assessments of India’s fiscal health, according to S&P Global.

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