Moody's Investors Service has changed the outlook for the long-term foreign currency deposit ratings of a number of Indian banks -- currently rated Ba2 -- from 'negative' to 'stable' for India.
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The global ratings agency, however, cautioned that high debt burden remains a constraint on the country's credit profile.
Although, Moody's expects that global and domestic factors, including potential shocks in agriculture, could keep India's growth below trend for the next few quarters.
Some banks called the Moody's move backward looking, arbitrary and unwarranted.
India's fiscal deficit and inflation outlook could prevent any upgrades in the country's sovereign rating, even as the economy is headed for recovery
Moody's said fiscal measures undertaken by the government -- such as corporate tax rate cuts, bank recapitalisation, infrastructure spending plans, support for the auto sector and others -- do not directly address widespread weakness in consumption demand, which has been the chief driver of the economy. In addition, interest rate cuts by the Reserve Bank of India are not being adequately transmitted to lending rates because of the credit squeeze caused by disruption in the non-bank financial sector, it said.
Moody's Investors Service, while silent on the sovereign rating on the higher-than-expected fiscal deficit numbers, expressed doubts over attaining the higher revenue targets and divestment realisation as assumed in the Budget. The Union Budget 2021-22 has pegged a fiscal deficit of 9.5 per cent for the current financial year as against the consensus 7 per cent, and 6.8 per cent for 2021-22 with a market borrowing of around Rs 12 lakh crore. It also assumes Rs 1.75 lakh crore to be scooped up from divestment.
The note was authored by Faraz Syed, an associate economist with Moody's Analytics.
The revision was announced before Indian markets opened on Thursday.
Moody's expected economic activity to pick up in 2020 and 2021 to 6.6 per cent and 6.7 per cent, respectively.
Revision in the context of an ongoing global review affecting financial institutions: Moody's
The RBI said there is an upward bias on inflation projection.
The Modi administration has been unable to initiate key reforms.
Moody's Analytics had said Prime Minister Narendra Modi must keep BJP members in check or risk "losing domestic and global credibility".
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Central bank Governor Raghuram Rajan drew kudos from Moody's Analytics for his monetary stance.
'Modi must keep his members in check or risk losing domestic and global credibility,' Moody's warned.
The ministry sought to allay the rating agency's concerns and said economic growth was on an upward swing.
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Moody's Investors Service on Thursday said India is likely continue to face challenges in raising longer-term growth potential and creating enough jobs for its young population in the absence of higher trade openness. In its report on South Asia sovereigns, Moody's said compared with other South Asian economies, India appears to be in a better position to deepen its integration in global value chains, attract FDI and increase exports. The country has better macroeconomic fundamentals, more stable politics and a more developed export sector.
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"The 2017 state election results in India demonstrate broad-based popular support for the Indian government's policy agenda and will facilitate the implementation of further reforms, a credit positive for the sovereign," Moody's said in a statement.
Despite the increased business risks, the rating agency affirmed Baa2 ratings, three notches down from the highest grade, with a stable outlook for RIL, Moody's Investor Service said in its weekly outlook.
Moody's on Thursday said the new 'inflation targeting' mechanism is a "credit positive" move.
Amid wholesale price-based inflation ticking up to 7.5 per cent year-on-year in May due to supply-side factors, the agency said it will cause further "headaches" at the RBI.
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Earlier, ratings agencies like Standard and Poor's and Fitch had threated to downgrade India's sovereign credit rating to junk grade in view of the worsening fiscal position of the government.
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The rupee had slumped to a record low of 59.9850 rupee to the dollar on Thursday, as the country's record high current account deficit is exacerbating its vulnerability in an emerging market rout.
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Moody's had revised credit outlook of Germany to negative, raising the possibility of the economic major losing its coveted 'Aaa' rating amid worsening European debt turmoil.
Moody's said implementation challenges, in addition to affecting growth and government revenues, will impact corporates by lowering sales volumes and cash flows.
Moody's said domestic growth will offset global headwinds.
Moody's, which cut its FY14 growth estimate to 4.5 per cent recently, said economic growth will be lowest in a decade.
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