India's credit trend in 2015 hinges on reining fiscal deficit: Moody's

US Fed tightening may trigger capital, forex volatility

Global rating agency Moody’s said on Wednesday that India’s credit trend in 2015 will depend on the steps the government will take to address issues such as high fiscal expenditures, recurrent food price inflation, and a wide infrastructure deficit.

The sovereign outlook for India (Baa3) remains stable. The global sovereign outlook for 2015 is also stable as a gradual global recovery supports sovereign credit quality, Moody’s said in its outlook report 2015 Outlook: Global Sovereigns, released on Wednesday.

Inflation and the current account deficit have declined in the past year. However, a tightening in the US monetary policy could still result in some volatility in capital inflows and the exchange rate.

The strong political mandate won by Narendra Modi’s National Democratic Alliance in May 2014 coincided with growth recovery, abating inflation and declining global commodity prices. Under these conditions, the new government’s ‘Make in India’ campaign and the Reserve Bank’s efforts to enhance banking system efficiency could increase India’s savings, investment and productivity and support the sovereign credit profile through accelerated economic growth.

However, without any efforts to address India's rigid fiscal expenditure, recurrent food price inflation and wide infrastructure deficit, external shocks or domestic macro-economic imbalances could interrupt growth cycle, as they did in 2012 and 2013.

Referring to Asia-Pacific sovereigns, Moody’s said they are generally well positioned in terms of their ability to respond to possible economic or financial shocks in 2015. Most have a low reliance on external funding and have built up a number of strong buffers against shocks.

According to Moody's, the global sovereign outlook for 2015 is also stable as a gradual global recovery supports credit quality. However, GDP growth rates for sovereigns globally are likely to remain lower than the levels seen before the global financial crisis in 2008-09.

The report identifies four possible drivers of sovereign credit quality in 2015.

One, the possibility of confidence shocks from the expected rise in US interest rates, especially in the case of a disorderly market reaction.

Then, the impact of lower-than-anticipated growth in China and the euro area might weigh on credit quality.

Thirdly, there is an element of overhang of geopolitical risk. At present, this appears unlikely to exert influence on credit profiles in the Asia-Pacific region.

And finally, the ability and willingness of governments to undertake structural reform would have a bearing on sovereign credit trend