NEW DELHI: Global ratings agency Standard & Poor’s (S&P) has said that high commodity prices and stronger dollar do not pose a risk to India’s credit rating as India is in a position of strength.
According to S&P, India’s debt stock and interest burden are high. However, the projected fast economic growth will stave off a further deterioration. “However, India would face more difficulty in sustaining its weak debt and fiscal positions if the economy slows materially,” the rating agency said. S&P has a BBB (minus) rating with a stable outlook for India.
Speaking at the India Spotlight 2022 webinar, S&P Sovereign & International Public Finance Ratings director Andrew Wood said domestic demand recovery is supporting growth. Private consumption has been slow to recover, but activity picked up over April-June. However, services activity momentum weakened in July.
“Emerging markets are facing broad-based external pressures from higher commodity prices, US dollar dominance, and tightening financial conditions. India is no exception, with hallmarks of these factors including a higher current account deficit and higher domestic inflation rates. However, India is facing these trends from a position of relative strength.”
The ratings agency expects India’s GDP growth rate to slow to 6.5% in FY24 from its forecasted growth of 7.3% for FY23. Growth is expected to pick up again to 6.7% in FY25. The economy recorded a growth of 8.7% in 2021-22.
S&P Global ratings economist for Asia-Pacific Vishrut Rana said inflation was going to be a key concern for the economy for the current fiscal year. “We expect a 6.8% inflation rate this year with risk to upside,” said Rana, adding that it expects the Reserve Bank of India (RBI) to raise interest rates to 5.65% to rein in inflationary pressures. Rana said good monsoon rains will have a favourable impact on food inflation but elevated energy prices will put pressure.
The ratings agency, however, does not see inflation coming within the 4% level even by FY25. It expects it to ease to 5% in FY24 and slow further to 4.5% in FY25.
A combination of inflation and 250 basis points increase in policy rates is expected to push up non-performing loans by 50-75 basis points. The economic growth would, however, ease the stress on the banking sector. Home loans have been growing, but the low leverage (Average loan to value at 70%) and high prepayment rates will protect lenders from stress.
