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India on firm ground, but severe conditions may hit outlook: S&P

India is facing a cacophony of factors that may shake its sovereign credit metrics, though the country’s strong economic growth and sound external balance sheet provide a solid buffer against global market turbulence, S&P Global Ratings said on Wednesday.

The ratings agency sees a 7.3% “sturdy growth supported by solid underlying momentum” in FY23, riding a strong domestic economy.

“High-frequency indicators, including purchasing manager’s indices in services and manufacturing, automobile sales, and labour market surveys, suggest that India has so far maintained its momentum against the advent of external difficulties,” S&P said in an FAQ ‘Can India Sovereign Ratings Withstand The Global Sputter?’

India’s banking sector has shown solid recovery prospects and both private consumption and investment trends remain favourable, it said.

The country’s BBB- rating with a ‘stable’ outlook could, however, face pressure under “more severe conditions”, the ratings agency warned.

Growth, inflation and CAD

S&P’s FY23 growth forecast is higher than the Reserve Bank of India’s 7% and half a percentage point more than the International Monetary Fund’s downward revised 6.8%.

A deeper global economic slowdown currently anticipated could have an adverse impact on India’s economic performance in fiscals 2023 and 2024, S&P said, flagging multiple risks.

These include tighter global monetary conditions, prolonged high inflation, and poor investment or consumer sentiment both at home and abroad.

Foreign exchange reserves have dropped to about $533 billion from a peak of about $634 billion in 2021, in part because of the growing current account deficit that S&P says will jump to 3% of GDP in the current fiscal year from 1.6% in the preceding fiscal.

S&P expects commodity prices, particularly for energy, to stabilise around current levels through 2023, after which they may decline more meaningfully, which would help moderate the current account deficit.

“India is also likely to continue benefiting from the active use of its currency in international transactions and the government’s ability to fund itself via deep local currency debt market,” it said, taking note of attempts at rupee-denominated bilateral trade.

On a positive note, India’s economy is unlikely to downshift for an extended time because of these risks given its predominantly domestic orientation, it said.

The external trends are fuelling consumer price inflation and interest rates in India, and this trend is expected to sustain at least in the remainder of this fiscal.

It sees 6.8% inflation in FY23, declining to 5.0% in fiscal 2024 and 4.5% per year beyond that.

“We expect the RBI’s policy rate to end fiscal 2023 at 5.9% versus 4.0% prior to the commencement of the tightening cycle,” it said, adding higher rates will suppress consumer behaviour.

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