ARC Ratings retains BBB+ rating for India with stable outlook

Global rating agency ARC Ratings today affirmed the BBB+ rating to the country and maintained a stable outlook on expectation of the a strong economic growth.
The rating action comes even as the first quarter GDP growth slowed to a three-year low of 5.7 per cent and every agency that monitors Asia's third largest economy lowered their year-end forecast to under 7 per cent.
The report also affirmed its 'A-' foreign currency and 'A' local currency country ceilings for the country.
"A solid outlook for economic dynamism continues to drive the sovereign ratings. India continues to enjoy solid economic performance and a strong medium term growth outlook, with real GDP growing 7.1 per cent in FY2017," ARC Ratings said in a report.

This performance clearly exceeds the average performance of peers and is exceptional in the context of expectations for moderate global growth plagued by downside risks associated with increased protectionism, political uncertainty and geopolitical risks, the report said.
The agency said lower growth is due to the short-term negative side effects of note ban, and GST implementation as well as the effects of the further deterioration of the twin balance sheet problem that affects the economy.

The rating action is also supported by a comfortable external position marked by low external debt of nearly 20 per cent of GDP, an unblemished debt repayments record, external liquidity from large diaspora and favourable demographics that fuel demand.

The key risks to the ratings are weak government finances, characterised by low revenue yield and extreme inefficiencies in the government sector, a large government debt and sizeable fiscal deficits, serving as the main credit constraints.
Twin balance sheet problem, with weaknesses in the banks given the high NPAs and insufficient capital levels, combined with high corporate sector leverage (50 per cent of GDP) are the major impediments to higher growth, the report warned.