Ratings agency Moody's hiked India's sovereign credit rating outlook to stable from negative, citing an improvement in the financial sector and faster-than expected economic recovery across sectors.
"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 said in a report on October 5.
It said that with higher capital cushions and greater liquidity, banks and non-bank financial institutions pose much lesser risk to the sovereign than previously anticipated.
"And while risks stemming from a high debt burden and weak debt affordability remain, Moody's expects that the economic environment will allow for a gradual reduction of the general government fiscal deficit over the next few years, preventing further deterioration of the sovereign credit profile," it said.
The agency maintained India's sovereign rating at 'Baa3'.
Improving Credit Conditions
Moody's said that after years of the NPA crisis in the Indian banking system, things have changed for the better.
"Solvency in the financial system has strengthened, improving credit conditions which we expect to be sustained as policy settings normalize. Bank provisioning has allowed for the gradual write-off of legacy problem assets over the past few years," the report said, adding that banks have strengthened their capital positions, pointing to a stronger outlook for credit growth to support the economy.
The ratings agency said that it expects India’s real GDP growth to average around six percent over the medium term, reflecting a rebound in activity to levels at potential as conditions normalise following the second wave of Covid-19 pandemic
"The growth projections take into account structural challenges, including weak infrastructure, rigidities in labour, land and product markets that continue to constrain private investment and contribute to post-pandemic economic scarring,"it said.
It said that the various economic relief measures announced by the government over the past year and a half. if implemented effectively, would be credit positive and could lead to higher potential growth than expected.
Economic recovery underway
In its report, Moody's said that economic was recovery is underway with activity picking up and broadening across sectors.
"Following a deep contraction of 7.3 percent in FY2020-21, Moody's expects India's real GDP to surpass 2019 levels this fiscal year, rebounding to a growth rate of 9.3 percent, followed by 7.9 percent in fiscal 2022.
Moody's said that downside risks to growth from subsequent coronavirus infection waves were mitigated by rising vaccination rates and more selective use of restrictions on economic activity, as seen during the second wave.