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High fiscal deficit, inflation cap rating upgrade: Moody’s

Despite positive growth figures achieved by the economy in the first quarter, rating agency Moody’s on Wednesday said high fiscal deficit and sticky inflation limit chances of an upward revision in the country’s sovereign ratings.

“We forecast fiscal (deficit), inflation and infrastructure metrics to remain weaker than the median for similarly rated peers.

“While stronger growth in this large and diverse economy will help counterbalance these credit challenges, they limit further upward momentum in the sovereign rating,” Moody’s Investors Service said in a note issued from Singapore.

The comments come days after the government released the Q1 GDP numbers at 5.7 percent and CAD at 1.7 percent of GDP.

The government has committed a 4.1 percent fiscal deficit target for the fiscal, but has already exhausted over 61 percent of the fiscal’s target in the first four months itself.

Inflation measured by consumer price index continues to skirt around the 8 percent mark, with upward pressures being exerted by food prices due to weak monsoon.

The agency, which has a ‘Baa3’ rating with a stable outlook on the country, said the 5.7 percent GDP print in the April-June period is in line with its “long-held view that growth deceleration to sub-5 percent levels over the past two years would reverse over time.”

The agency further said it is due to this view that it has maintained a “stable outlook” in spite of issues like currency volatility, declining private and public investments and poor market sentiment (in the past two fiscals due to adverse tax policies of the previous regime).

Moody’s said the higher growth numbers in Q1 will help improve tax revenues and capital flows into the country, and can also help reverse the weakening metrics that have occurred in the fiscal and external position in recent years.

Additionally, Moody’s said the macroeconomic outlook will improve if the government is able to “implement policies that ease inflationary pressures and increase infrastructure investment”.

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