S&P: External channels unlikely to put serious near-term pressure on India
Global ratings agency S&P said on Thursday that India’s creditworthiness is unlikely to come under “significant short-term pressure” from cyclical headwinds caused by external channels, given its strong foreign exchange reserves and its limited external debt.
S&P maintained India’s sovereign rating at the lowest investment level of BBB-, with a “stable” outlook. The other global agencies, Moody’s and Fitch, also maintained similar ratings and outlooks for the country.
“Emerging markets are facing widespread external pressures from rising commodity prices, the dominance of the US dollar and tighter financial conditions. India is no exception, with features of these factors including higher current account deficit and higher national inflation rates,” the agency said.
“However, India faces these trends from a position of relative strength. In particular, India is a net creditor of the world (narrow basis of net foreign debt), which means that it has some leeway against cyclical difficulties such as these. So we don’t see any short-term material pressure on India’s creditworthiness on this basis,” he added.
Speaking at the India Credit Spotlight 2022 webinar, Andrew Wood, director of S&P Sovereign & International Public Finance Ratings, expected India’s economy to grow 7.3% in this fiscal year from 8.9 % (albeit on a contractual basis) in FY22. However, growth may moderate to around 6.5% over the next two years.
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The movement of the rupee against the dollar was also relatively subdued, he added. The rupiah has weakened around 7% against the greenback so far in 2022, but it has fared better than its emerging market counterparts.
India has built up a large reserve of foreign exchange and the pot will likely recover to $600 billion by the end of this year, Wood said. Foreign exchange reserves stood at $571 billion as of August 12, after falling from a record high of $642 billion in September 2021, in part due to its defense of the national currency.
“This is quite a sufficient buffer given the somewhat limited external indebtedness of the Indian economy as a whole,” Wood said.
Wood did not expect “very powerful fiscal consolidation” in India over the next few years. The stock of general government debt, around 90% of GDP, and the interest burden remain high. While rapid economic growth will help prevent further deterioration in public finances, any “significant slowdown” in the economy or GDP growth at a “much lower growth rate” for an extended period would make it difficult to ensure debt sustainability, he added. said.
A number of agencies have lowered their growth projections for India in recent months after the war in Ukraine pushed up global commodity prices, especially oil. The IMF recently cut growth in India to 7.4% from 8.2% forecast in April. The World Bank also reduced it from 8% to 7.5% and S&P to 7.3% from 7.8%.
However, most independent agencies have pointed out that India’s relatively strong macroeconomic fundamentals will help it weather external headwinds better than many of its peers.