S&P retains India's sovereign rating at 'BBB-'; keeps outlook stable

S&P on Wednesday retained India's sovereign rating at 'BBB-' with a stable outlook, saying that while risks to growth are rising, the economy and fiscal position will stabilise and begin to recover from 2021 onwards.

India's long-term rating was affirmed at 'BBB-' with a stable outlook while the short-term rating was held at 'A-3'.

S&P has forecast India's economy to shrink by 5 per cent this fiscal.

Earlier this month, Moody's downgraded India to a notch above junk, falling in line with other global agencies, but also cut its outlook to 'negative' on the back of rising debt and persistent stress in the financial system.

"The stable outlook reflects our expectation that India's economy will recover following the containment of Covid-19 pandemic and the country will maintain its sound net external position," S&P said while affirming India's rating at 'BBB-' and maintaining a stable outlook.

S&P's stable outlook reflects its expectation that the Indian economy will recover following the containment of the Covid-19 pandemic, and maintain its sound net external position, it said.

The agency also assumes that the government's fiscal deficit will recede markedly following a multi-year high this fiscal year.

"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," analysts at the firm wrote.

S&P expects the government's fiscal deficit to touch 11% of GDP in the current year to March 2021 on the back of pandemic related spending and said the government's ability to consolidate its finances once the economy begins to recover will be key in determining the sustainability of India's debt stock.

India's ratings could be raised if the government significantly curtails its fiscal deficits, resulting in materially lower net indebtedness at the general government level, S&P said.

Downside pressure on ratings would emerge from failure of GDP growth recovering meaningfully from 2021 onwards and also net government deficit levels sharply exceeding forecasts, it added.

"India's overall external position remains a credit strength, largely owing to the economy's limited external indebtedness," the analysts wrote.

"We expect India's current account deficit to decline modestly this year, and to continue to improve over the forecast period, largely owing to its improving terms of trade on weaker oil prices".