Moody's: India's Election Results Confirm Market Expectations, Policy

Actions to Determine Credit Implications

The significant parliamentary majority won by the Bharatiya Janata Party (BJP) led National Democratic Alliance in India (Baa3, stable outlook) is likely to sustain the investor sentiment which has recently boosted equity indices and the rupee, says Moody's Investors Service. However, Moody's notes that the impact of today's election results on the country's credit profile will only be apparent over the next several months, as economic policy measures are implemented.

While policy measures to revive the economy are likely over the coming months, India's growth, fiscal, and inflation metrics are unlikely to improve immediately. In the medium term, the extent to which they do will depend on the specific measures adopted by the new government as well as the pace of their implementation.

Soaring Market Indicators Reflect Sentiment, Economic Data Reveal Subdued Growth Outlook

Expectations that the BJP would win a considerable majority and pursue policies conducive to investment and economic growth contributed to the more than 17% rise in the BSE Sensex in the three months leading up to the announcement of election results. Foreign portfolio inflows appear to have helped drive this increase, as well as the 4% appreciation of the rupee against the US dollar since the beginning of the year. Both equity markets and the value of the rupee rose further as election results were announced on May 16.

However, economic trends will take longer to improve than sentiment did. Economic data published so far this year reveals that industrial output is still weak (it declined by 0.5% on an annual basis in March). Moreover, inflation remains elevated (at 8.6% in April), limiting the scope for monetary stimulus to revive growth. Nonetheless, industrial momentum could pick up in the second half of the year, as stalled investment resumes and consumer confidence increases. We expect GDP growth to continue to be below potential, at about 5% this year, and the possibility of a sub-par harvest due to El Nino effects poses downside risks.

Policy Actions Will Determine Trends In Sovereign Credit Profile

India's GDP growth rate has been higher than many peer country averages even during the slowdown of the last two years. However, its fiscal metrics, inflation performance and infrastructure are all weaker than those of other Baa-rated countries. India's relatively high fiscal deficits fuel inflationary pressures and raise private sector borrowing costs. Meanwhile, regulatory restrictions that discourage investment pose supply constraints that curtail growth and underpin recurrent inflationary pressures. In addition, limited financing options and high project implementation risks have inhibited the development of India's infrastructure.

As a result, changes in India's sovereign credit profile do not hinge upon GDP growth alone. Rather, future assessments of the sovereign credit profile will depend on developments in the following areas: 1) The government's fiscal position; 2) The regulatory constraints on investment and output; and 3) Growth in social and physical infrastructure.

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