Indian economy riskier, but rating stable: Moody’s

August 4th, 2008 - 9:00 pm ICT by IANS  

New Delhi, Aug 4 (IANS) Higher oil prices and insufficient government response may make the Indian economy riskier, but it will not affect its ratings, international rating agency Moody’s said Monday. “While Moody’s overall assessment is that the current constellation of risks is captured in the prevailing stable outlook, downside pressures could emerge,” said Aninda Mitra, senior analyst at Moody’s Sovereign Risk Unit in a press statement released in Singapore.

He said these pressures could be two-fold.

“First, they could involve deteriorations in the government’s general debt metrics and its access to external liquidity, given [the] intensified commodity price shocks and an inadequate fiscal response.”

Second, there could be pressures due to “rising risk of fiscal spillovers to India’s external accounts”.

These “spillovers” could weaken the case for the two-notch gap between its foreign currency and local currency ratings, Mitra said.

He warned that with higher oil price and a lack of adequate fiscal policy reactions amid high pent-up price pressures, “policy as well as market interest rates could rise, and a sharp deceleration in growth may follow”.

Concurrently, “greater government borrowing needs, while not leading to a material deterioration of its key credit metrics, would likely prevent an improvement in the remainder of FY08-09, contrary to our earlier expectation,” he said.

Last week, Reserve Bank of India Governor Y.V. Reddy lowered the economic growth forecast to 8 percent from 8.5 percent pegged at the start of the financial year.

Mitra made his remarks in conjunction with the release of a new Moody’s report on the outlook for India’s sovereign ratings.

In the report that he authored, Mitra examines the economic factors that drive the ratings as well as the reasons behind the two-notch differential between its Baa3 foreign currency rating and Ba2 local currency rating.

Noting that political issues play a role in India’s fiscal problems, the report said the government’s difficult was partially related to its inability to raise retail fuel prices and reduce the growing, off-budget fiscal cost of reimbursing downstream oil companies as part of its subsidies program.

Further, the report said the outlook for reform remains uncertain, despite the Left parties withdrawing support to the United Progressive Alliance government.

“Elections are due in less than a year’s time, and it is not clear whether the new coalition partners would support further reforms that could alleviate the country’s economic stresses,” Mitra said.

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