Moody's: India's credit trends will depend on government policy in 2015

Moody's Investors Service says that the sovereign outlook for India (Baa3) remains stable, and credit trends in 2015 will depend on the extent to which the government addresses high fiscal expenditures, recurrent food price inflation, and wide infrastructure deficits.

From a broader perspective, Moody's says the global sovereign outlook for 2015 is also stable as a gradual global recovery supports sovereign credit quality. However, Moody's says that 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:

1) The possibility of confidence shocks from the expected rise in US interest rates, especially in the case of a disorderly market reaction

2) The impact of lower than anticipated growth in China and the euro area

3) The overhang of geopolitical risk, (although this currently appears unlikely to exert influence on credit profiles in Asia Pacific)

4) The ability and willingness of governments to undertake structural reform

Of the four factors, India is most exposed to the first and the fourth.

Specifically, the Moody's report says that although inflation and the current account deficit have declined over the last year, a tightening in US monetary policy could still result in some volatility in capital inflows and the exchange rate.

Moreover, elevated government debt and the risk of recurrent inflation limit room for the authorities to stimulate the economy in the event of a shock from significantly lower-than-anticipated global growth.

On the other hand, Moody's says that the government's recent policy measures -- diesel-price deregulation, a greater focus on local manufacturing, as well as the central bank's efforts to contain inflationary pressures and raise banking system efficiency -- could increase savings, investment and productivity in the Indian economy.

Moody's says that if the above steps are augmented with additional steps in 2015 to address infrastructure gaps and attract foreign direct investment flows, government policies could support the sovereign's credit profile through higher medium term GDP growth.

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