Credit ratings agency Standard & Poor’s (S&P) has retained India’s sovereign rating at “BBB-/A-3” with a stable outlook. The global ratings agency has said that the economic hit from COVID-19 will exacerbate India’s weak fiscal settings. “We expect a materially larger fiscal deficit this year, followed by consolidation over the next three years,” S&P said in a press release. “The stable outlook reflects our view that India’s economy, and fiscal position, will stabilize and begin to recover from 2021 onwards,” S&P said. More than a week ago, ratings agency, Moody’s downgraded India’s sovereign rating citing challenges in implementation of policies to mitigate risks of a sustained period of low growth and deteriorating fiscal position.
While risks to India’s long-term growth rate are rising, ongoing economic reforms, if executed well, should keep the country’s growth rate ahead of peers. We are affirming our ‘BBB-‘ long-term and ‘A-3’ short-term foreign and local currency sovereign credit ratings on India, S&P said.
S&P added that it could raise the ratings on India if the government significantly curtails its fiscal deficits, resulting in materially lower net indebtedness at the general government level.
Tighter lending conditions continue across the financial system, particularly in the public sector. This is reflected in a gradual decline in credit growth, which is likely to remain weak owing to subdued demand and limited risk appetite by the banks, S&P said.
S&P said that the liquidity concerns in some parts of the non-bank financial institution (NBFI) sector have also re-emerged since the onset of the COVID-19 crisis.
“Despite generally ample liquidity in the banking sector, credit extension to less creditworthy borrowers in the NBFI space may remain weak for some time owing to heightened prudence in banks’ lending standards. Government measures aimed at backstopping NBFI debt should help to alleviate these conditions to some extent,” S&P said.
India’s economy faces stark challenges in the near-term. However, we believe the country’s long-term outperformance will remain intact, the global ratings agency added.