Moody's and ICRA poll finds India's growth in 2016 increasingly vulnerable to external risks

Moody's Investors Service says that a poll that Moody's and its Indian affiliate, ICRA, conducted in Mumbai in mid-January 2016 shows that market concerns over India's (Baa3 positive) economic exposure to external risks have risen over the past seven months.

"The market participants we surveyed are increasingly concerned about the potential spillover on India's growth story of external risks such as interest rate tightening in the US and China's ongoing slowdown," says Rahul Ghosh, a Moody's Vice President and Senior Research Analyst.

Of the market participants who responded to Moody's and ICRA's question on the greatest risk to India's macroeconomic growth over the next 12-18 months, 35% saw external shocks as the greatest challenge facing India's economy, up from just 10% for the previous Moody's and ICRA poll conducted in May 2015.

"However, the result is more likely a reflection of the broad-based spike in global risk aversion, rather than India's relative vulnerabilities," adds Ghosh. "Investors see India as much better placed in terms of growth than most of its similarly rated emerging market peers, such as Indonesia, Turkey, Brazil, South Africa and Russia."

The report discusses results from real-time polls conducted during Moody's and ICRA's India Outlook Conference in Mumbai on 13 January 2016. The event brought together some of the country's largest investors, intermediaries and issuers, with 110 market participants attending.

The same poll of respondents found that 32% thought sluggish reform momentum will be the largest threat to India's GDP growth, down from 47% in May 2015. By contrast, 19% (38% in May 2015) said infrastructure constraints were the most important factor.

As for the market participants who responded to the polling question on India's economic growth rate, more than three quarters of those surveyed said headline GDP growth will stay between 6.5% and 7.5% over the next 12 to 18 months.

Only 14% of participants expected growth to reach between 7.5% and 8.5%. This result was down from the 36% of respondents surveyed in May 2015.

Moody's baseline growth outlook for India mirrors the majority view of the market participants surveyed. Moody's projects a full year real GDP growth of 7.0% in the fiscal year ending 31 March 2016, rising to 7.5% in the subsequent fiscal year.

On the asset quality of Indian banks, the market participants polled were split on whether government initiatives will help improve the banks' asset quality, with 40% expecting a reduction in weak assets in the coming 12-18 months compared with 45% who believe asset quality is unlikely to improve.

Nevertheless, there was a clear consensus on expectations of further weakness for public-sector banks, with 89% expecting single digit loan growth for these banks, due to capital constraints.

The report points out that in November 2015, Moody's changed its outlook on India's banking system to stable from negative, due to Moody's expectation that a gradually improving operating environment will result in a slower pace of problem loan creation and, as a result, the credit metrics of Indian banks will stabilize gradually.

However, Moody's says the capital buffers for public-sector banks will remain thin, with Common Equity Tier 1 ratios typically in the 6%-10% range.

As for Indian corporates, 50% of the respondents polled said policy implementation will represent the key driver of credit conditions for companies in India over the next 12-18 months, and 21% said external risks will constitute the key driver.

When asked about private sector investment growth, 58% of those surveyed said such growth will recover only gradually through until mid-2017.

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