India`s risks on the rise: Moody`s

But it won’t downgrade the country’s rating for now.

Global rating major Moody’s today said the government’s deteriorating debt level, mainly due to oil and fertiliser subsidies, and an inadequate fiscal response could further increase the downside pressure on India’s rating.

“The risks confronting India’s economy have grown. The rise, however, is not yet to the extent that the government’s local currency ratings are threatened,” Moody’s said in a statement. At present, India’s sovereign foreign currency rating is Baa3, the lowest investment grade rating, while the local currency rating of Ba2 is below investment grade.

“Higher oil prices and the lack of adequate fiscal policy reactions amidst high pent-up price pressures are putting the burden of macro-economic adjustment on the monetary authorities,” said Aninda Mitra, vice-president and senior analyst with Moody’s Sovereign Risk Unit. “As a result, policy as well as market interest rates could rise, and a sharp deceleration in growth may follow,” he said, adding that “greater government borrowing needs, would likely prevent an improvement in the remainder of 2008-09, contrary to our earlier expectation.”

 

Last month, Fitch lowered India’s long-term local currency outlook from stable to negative.

Pointing to the impact of political factors on fiscal policy, especially when elections in many states are due, Moody’s said the reforms outlook remained bleak despite the Congress-led coalition parting ways with the Left and reshuffling its partners. The rating agency said there is a deep political unwillingness in pushing forward structural fiscal reforms that introduce market forces for product pricing.

The elections are due in less than a year’s time, and it is not clear whether the new coalition partners would support further reforms, Mitra said.

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