S&P Says Cacophony Of Factors May Shake India’s Credit Ratings

India is facing "a cacophony of factors" that may shake its sovereign credit ratings, but strong GDP growth and external balance sheet is likely to help the economy hold its ground.

That's according to S&P Global Ratings, which has pegged India at its lowest investment grade of 'BBB-' with stable outlook.

In a credit FAQ titled 'Can India Sovereign Ratings Withstand The Global Sputter', S&P said that despite a strong external balance sheet, India has not been able to escape the difficult landscape its emerging market peers have faced over the course of the year. "More severe conditions" could apply downward pressure on India's sovereign credit ratings, it said.

"India is facing a mixture of factors that may shake its sovereign credit metrics," Andrew Wood, sovereign analyst at S&P Global Ratings, said in the credit FAQ. "Amid external turbulence, its forex reserves are falling, and its current account deficit is rising. The economy is battling faster inflation and tightening financial conditions both at home and globally."

India's strong economic growth rate has long been an important counterbalance to its high fiscal deficits and debt burdens, and its sound external balance sheet helps to buffer against global market turbulence.

"We expect these strengths to help neutralise the risks inherent in the treacherous global environment," the US-based agency said in the note.

S&P forecasts India's GDP growth at 7.3% in 2022-23 from 8.7% last year. The Reserve Bank of India sees 7% expansion this fiscal.

"Under more severe conditions though, a few factors could've the potential to apply downward pressure on our sovereign credit ratings on India," said Wood.

The fall in India's forex reserves to $533 billion at present from a peak of about $634 billion in 2021 is driven in part by India's growing current account deficit, S&P said. It forecast the CAD to jump to 3% of GDP in the current fiscal, from 1.6% of GDP in 2021-22 on surging import bill.

But India is likely to continue to benefit from the active use of its currency in international transactions and the government's ability to fund itself via deep local currency debt markets.

S&P said a deeper global economic slowdown than currently anticipated could have an adverse impact on India's economic performance in fiscals 2023 and 2024.

Potential channels of risk for India include tighter global monetary policy, prolonged high inflation, and poor investment or consumer sentiment at home and abroad.

"In our view, India's economy is unlikely to downshift for an extended time on this basis alone, especially given its predominantly domestic orientation," Wood said. "Still, in the event of a prolonged downturn in real and nominal GDP growth, material downward pressure on the sovereign ratings could emerge, especially if large government deficits are left unchecked."

S&P forecasts India's GDP growth at 6.5% to 7.3% through fiscal 2026.

On inflation, S&P said, the external trends are fuelling higher consumer price inflation and interest rates in India, and this trend would continue until March 2023.

"We expect the RBI's policy rate to end fiscal 2023 at 5.9%… We retain our forecast for inflation to average 6.8% in fiscal 2023, before falling to 5% in fiscal 2024 and 4.5% per year beyond that," S&P said.