The Indian economy, after growing at over 9 per cent for three successive years has lost the steam and grew at sub-5 per cent in the past two fiscals due to policy paralysis under the past government.
Rating agency Moody's Investors Service on Wednesday said the sovereign outlook for the country remains stable at Baa3, but future rating trends depend on the reform measures taken by the government.
"Sovereign credit rating trends in 2015 will depend on the extent to which the government addresses high fiscal expenditures, recurrent food price inflation, and wide infrastructure deficit," Moody's said in a report.
All the three big international rating agencies such as S&P, Moody's and Fitch have BBB ratings on the country's sovereign with a stable outlook.
The current rating is closest to junk status or below investment grade.
The report says the government's ability and willingness to undertake structural reforms will have a bearing on the credit rating outlook of the country.
"The government's recent policy measures, such as diesel price deregulation, a greater focus on local manufacturing, as well as the Reserve Bank's efforts to contain inflationary pressures and raise banking system efficiency, could increase savings, investment and productivity in the economy," Moody's said.
The report further said the recent steps are augmented with additional steps next year to address infrastructure gaps and attract foreign direct investment inflows, government policies can support the sovereign credit profile through higher medium term GDP growth.
The economy, after growing at over 9 per cent for three successive years has lost the steam and grew at sub-5 per cent in the past two fiscals due to policy paralysis under the past government. In the first quarter of this fiscal the GDP clipped at an unexpected 5.7 per cent, while the Q2 GDP print is slated to be much lower at 5-5.3 per cent.
The government will release the Q2 GDP numbers later this week. The report said the possibility of confidence shocks from the expected rise in US interest rates, especially in the case of a disorderly market reaction may have an impact on the country's credit quality.
The report believes that although inflation and the current account deficit have declined over the last year, a tightening in US monetary policy could still result in some volatility in capital inflows and the exchange rate. Moreover, elevated government debt and the risk of recurrent inflation limit room for the authorities to stimulate the economy in the event of a shock from significantly lower-than-anticipated global growth, it added.
The rating agency also said the global sovereign outlook for 2015 is stable as a gradual global recovery supports sovereign credit quality.
"However, GDP growth rates for sovereigns globally are likely to remain lower than the levels seen before the global financial crisis in 2008-09," the report said.