S&P affirms India’s rating at 'BBB-' with stable outlook

New Delhi, February 13

Global ratings agency Standard and Poor's today affirmed India's sovereign rating at ‘BBB-’ with stable outlook, saying the country's GDP growth is likely to gradually recover towards longer-term trend rates over the next two to three years.

'BBB' rating refers to adequate capacity of the rated entity to meet its financial commitments.

"Despite a notable deceleration in India's economy in recent quarters, we believe its structural growth outperformance remains intact. Real GDP growth is therefore likely to gradually recover toward longer-term trend rates over the next two to three years," S&P said in a statement.

It expects the economic growth rate to improve to 6% during 2020-21, 7% in the next fiscal and 7.4% thereafter.

"We expect India's economy to continue to outperform peers at a similar level of income, despite a recent slowdown in real GDP growth.

"Supportive monetary, fiscal, and cyclical factors should support economic recovery, with real GDP growth averaging 7.1% in fiscals 2020-2024," it said.

The agency, however, pointed out that India's fiscal position remains precarious, with elevated fiscal deficits and net government indebtedness.

Fiscal deficits have exceeded the government's plan, S&P said, adding it expects limited consolidation over the next few years.

"S&P Global Ratings affirmed its 'BBB-' long-term and 'A-3' short-term unsolicited foreign and local currency sovereign credit ratings on India. The outlook on the long-term rating is stable," it said in a statement.

As per the National Statistical Office (NSO), India's GDP growth is estimated to slow down to 5 per cent during 2019-20. The government expects growth to rebound to over 6 per cent in the next financial year.

Providing rationale for its rating action, S&P said the ratings on India reflect the country's above-average real GDP growth, sound external profile, and evolving monetary settings.

As per the statement, the stable outlook reflects S&P's expectation that India's growth will be strong, the country will maintain its sound net external position, and its fiscal deficits will remain elevated but broadly in line with its forecasts over the next two years.

Further, "upward pressure" on the ratings could build if the government significantly curtails its fiscal deficits, resulting in lower net indebtedness at the general government level. Upside potential on the ratings could also increase if India's external accounts strengthen substantially.

Also, the downward pressure on the ratings could emerge if India's GDP growth falls well below the agency's forecasts, causing it to reassess view of trend growth; net general government deficits rise further from their currently elevated levels; and political developments materially undermine economic reform momentum.

S&P further said the Indian economy has slowed measurably. Real GDP growth fell to a more than six-year low of 4.5 per cent in the second quarter of this fiscal. This was the fifth consecutive quarter of decline in year-on-year growth rate.

It also noted that tighter lending conditions continue across the financial system, particularly in the public sector.

This, it said, is reflected in a gradual decline in credit growth.

In combination with ongoing liquidity concerns in the non-bank financial institution (NBFI) sector following the September 2018 default by Infrastructure Leasing and Financial Services Ltd (IL&FS) and subsequent relatively less impactful defaults, domestic credit conditions have been somewhat mixed, it said.

Fiscal position ‘precarious’

• ‘BBB’ rating refers to adequate capacity of the rated entity to meet its financial commitments
• It expects the economic growth rate to improve to 6% during 2020-21, 7% in the next fiscal and 7.4% thereafter
• The agency, however, pointed out that India's fiscal position remains precarious, with elevated fiscal deficits and net government indebtedness

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