Global agency Moody’s on Thursday said any upgrade in India’s sovereign rating will depend on implementation of policies by its leaders to improve business environment for private sector and for infrastructure growth.
“How the recently elected leaders in India…Implement the pledges to improve infrastructure and governance will determine the credit trajectory of the sovereign,” Moody’s Investors Service said in a report.
Moody’s, which has given the lowest investment grade rating to India, named regulatory complexity and weak social and physical infrastructure as challenges before the country.
“The evolution of sovereign’s credit profile will hinge on whether its leaders are able to implement policies that facilitate infrastructure development and strengthen the private sector’s operating environment,” Moody’s said.
Earlier this month, Moody’s had upgraded India’s outlook to ‘positive’ from ‘stable’, but retained the credit rating at ‘Baa3’, just a notch above the junk grade.
Moody’s had said it would consider a rating upgrade after 12-18 months depending upon improvement in macroeconomic parameters.
In its report, Moody’s said India’s growth will outperform similarly rated peers, and macroeconomic policy vigilance is likely to contain inflation and balance of payments pressures in the near-term.
It said India’s sovereign rating reflects credit strengths of robust economic size and growth and credit challenges of weak governance and infrastructure.
Favourable savings levels, investment rates, and demographics are likely to keep India’s growth stronger than most Moody’s rated peers, it said.
Lower global commodity prices support India’s growth and balance of payments, but its banking system would pose sovereign risks over the medium-term if asset quality and capitalisation levels do not improve, Moody’s said.
The positive outlook incorporates the reduction in inflation and the balance of payments pressures over the last year, recent measures to address constraints on investment, including the passage of related bills in Parliament, and its expectation that India’s strong growth will improve its fiscal ratios over the rating horizon, it added.