India can weather turbulence without damage to credit ratings: S&P

India and other key nations in the Asia Pacific have strong balance sheets to weather current account deficits without hurting their external ratings, said Standard and Poor’s (S&P) on Thursday.

India is likely to lead the region with 7.3 per cent growth in 2022-23 after the GDP grew 8.7 per cent in 2021-22, said the rating agency in a report called 'Asia-Pacific Sovereign Rating Trends Midyear 2022: Resilience Amid Turbulence'. India’s sovereign rating is “BBB-/Stable /A-3”.

S&P’s commentary in March said the stable outlook for India reflected expectations that the economy will recover from the effects of the Covid-19 pandemic. India’s strong external settings will act as a buffer against financial stress despite the greater need for government funding for the next 24 months, said the commentary.

India’s current account deficit (CAD) decreased sequentially to $13.4 billion (1.5 per cent of GDP) in the March 2022 quarter from $22.2 billion (2.6 per cent of GDP) in December 2021 quarter. Foreign exchange reserves stood at $ 588.3 billion as of July 1, 2022, showed data from the Reserve Bank of India (RBI).

Also read: Nomura cuts 2023 India GDP forecast to 4.7% amid recession fears

S&P’s report on Thursday said the impact of higher food and energy imports on external balances would likely be absorbed within current rating levels.

Most sovereign ratings in Asia-Pacific are investment grade. The average sovereign rating in the region, lying between 'BBB' and 'BBB+', moved closer to 'BBB' in the first half of 2022 on account of Sri Lanka's default. This decline was mitigated by a few positive actions on other ratings.

The geopolitical, economic, and financial risks are rising, but Asia-Pacific sovereigns are entering the turbulence from a position of strength. Twenty of the 21 sovereign ratings in Asia-Pacific have stable outlooks, reflecting rating cushions that could absorb likely pressures in the next year or so.

The rising prices and the possibility of a global recession present the biggest risks to Asia-Pacific sovereign ratings in the second half, and beyond, it added.

Recent developments have hit South Asian sovereigns the hardest. These pressures contributed to the default by the Sri Lankan government and political unrest in Pakistan and increased Bangladesh's current account deficit.