Moody's explains why outlook on India is still stable

Moody's has reiterated a stable outlook on India. The rating agency seems a bit more positively inclined than S&P and Fitch which have been firing some really negative salvos on Indian macro.

In an interview to CNBC-TV18, Atsi Sheth of Moody's Investors Service explains the rationale behind the bullishness. She argues that weakness in the Indian economy is nothing new.

"India's slowdown is not so unique and we have to look at it in a global context. And lastly has the slowdown changed the government's ability to service its debt repayments beyond what is compatible with the BAA3 ratings. So a stable rating outlook on India doesn’t imply that growth is not changing, growth levels haven’t changed from there, much better than was in the past," she adds.

Here is an edited transcript of her interview. Also watch the accompanying video.

Q: You are the only rating agency which has maintained its stable outlook. So you seem to have a slightly more positive bias than your peers. What have you based your stable outlook on?

A: As we said in our recently released publication, all our ratings for all countries, which includes India are based in the expectation that the macro-economic conditions including growth, inflation, fiscal deficit, all these conditions will not remain static.

Macro economic conditions go up and down in every country and sovereign rating is not really a description of either past growth trends or expectation for future growth trends alone. Rather it is an analytic statement on the government’s ability to repay its debt, whether it is foreign currency or local currency.

So really a sovereign rating is a conclusion on credit worthiness. It is based on an analysis of growth trends and several other macro economic trends. But these trends are analysed in global perspective, so we ask if Indian growth will slowdown, if it is unique or is it new? Or is it irreversible? And the answer to those questions is no.

Indian growth has gone up and down in the past and it will continue to do so in the future also every other country is experiencing a growth slowdown. Hence, India's slowdown is not so unique and we have to look at it in a global context. And lastly has the slowdown changed the government's ability to service its debt repayments beyond what is compatible with the BAA3 ratings.

A stable rating outlook on India doesn’t imply that growth is not changing, growth levels haven’t changed from there, much better than was in the past.

But rather what it is saying, the impact of the current macroeconomic trends, our forecast of future macroeconomic trends, analyzed in the context of global trends are unlikely to change the willingness and ability of the government to service its debt.

Q: The crux of any optimism also seems to stem from the fact that we maybe facing relief on the current account deficit given what’s happened with oil prices and that they may likely be headed lower but that gets balanced off with the rupee. How would you read the current account situation?

A: I think that's a very good question and certainly some of the drivers of the current account deficit- one is of course the oil price, there is also other commodity imports that affect the current account deficit in India. Those trends have become much more benign then they were over the last 12 months.

Hence, there is reason to believe that the deficit will narrow. The other thing that drives the current account deficit is of course the differential between Indian growth - even as Indian growth slows down. It is far higher than that of its trading partners, which means that Indian import demand will probably grow a little bit more than export demand for India’s products, and that is the other driver.

And that is the other driver, which unfortunately I don't think export growth will pick up substantially over the next year despite significant depreciation largely because global growth looks like, is dampened still. I think that's one of the things that will not allow the current account deficit to correct significantly but certainly some of the other factors that you mentioned are more benign.