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Rediff.com  » Business » Reform policies to determine India's credit profile: Moody's

Reform policies to determine India's credit profile: Moody's

February 25, 2015 10:59 IST

Earlier, Standard & Poor's had said India must deliver on reform promises and boost growth as a weak fiscal position is constraining its sovereign rating.

GrowthReforms undertaken by the government to accelerate growth and address fiscal and supply side constraints will determine India's sovereign credit profile, rating agency Moody's said on Wednesday.

The declining inflation also calls for a policy rate cut to boost investments, it added.

". . . fiscal and structural reform policies will determine the extent to which accelerating growth will buttress the sovereign credit profile," it said in a report titled 'GDP Revisions Underscore Economic Strength, But Are Credit Neutral'.

In 2015, benign global oil prices are likely to keep India's inflation and current account pressures in check, the report said, adding ‘this could allow for more accommodative monetary policy which, in turn, would revive investment growth’.

Moody's said the upward revision in gross domestic product growth estimates on the basis of base year revision highlight the strength of the economy, but do not impact Moody's overall assessment of the sovereign's credit profile.

As per the new base year of 2011-12, Indian economy grew at 6.9 per cent in 2013-14, up from sub-5 per cent estimated when the base year was 2004-05.

With the new base year, the economy is projected to clock 7.4 per cent growth in current fiscal ending March 31.

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While the newly released data underscores that India's high economic growth supports its sovereign credit rating of 'Baa3' with a stable outlook, they did not change ratios for government finances, private external leverage and bank asset quality, all of which continue to pose sovereign credit risks, according to Moody's.

"Policies to address fiscal and supply side constraints will determine whether India's current growth momentum and macro-economic balance can be maintained over the coming years," Moody's said.

It also cautioned that India's wide fiscal deficits, poor infrastructure and regulatory complexity have combined to create a mismatch between domestic demand and supply, contributing to inflation and current account pressures.

Also, in the absence of government action to reduce fiscal deficits and structural supply constraints, a pick-up in domestic demand or rebound in global commodity prices could lead to renewed inflation and current account pressures over a three to five year horizon.

"Such a rise in macro economic imbalances could trigger balance of payment pressures, particularly if international liquidity conditions were to tighten from current levels," the report added.

After lowering interest rates by 0.25 per cent in mid January, the Reserve Bank of India had kept key rates on hold in its bi-monthly monetary policy review on February 3.

It had said that it would wait for the Budget on February 28 and other key economic data to decide on further rate cuts.

Earlier this week, another rating agency Standard & Poor's had said India must deliver on reform promises and boost growth as a weak fiscal position is constraining its sovereign rating.

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