Moody's retains India's stable outlook, warns against potential escalation of political tensions

Global rating agency Moody's retained the stable outlook for the Indian government, pegging the long-term rating at Baa-3 and short-term at P-3.

However, the agency said the escalation of political tensions would undermine India's long-term growth potential and put pressure on the rating. "In general, durably weaker growth than currently projected would contribute to an ongoing rise in the debt burden, which would weaken the sovereign's fiscal strength and put downward pressure on the rating. In addition, a resurgence of financial sector stress that is unlikely to be addressed promptly and effectively would also be credit negative," the Moody's report read.

Moody's said India's stable outlook is based on the calculations that the country's fiscal metrics would improve gradually amid strong growth prospects compared with peers.

"India's fiscal metrics will continue to gradually improve amid robust growth prospects compared to peers. Upside risks to inflation and correspondingly higher interst rates could challenge efforts to rein in spending and exacerbate already weak debt affordability," Moody's stated.

It added that the economic and social benefits of digitalisation could be larger than predicted currently. "The outlook also assumes broad financial and external stability as represented by resilient credit growth, ample domestic liquidity to meet the funding requirements of the public and private sector, manageable current account deficits and sufficiently large foreign-currency reserves to meet the country's external payment obligations," it added.