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Moody’s Latest Report Provides Encouragement
The global rating agency changed the Indian economy’s ratings from ‘negative’ to ‘stable’. Higher capital cushions and greater liquidity helped banks and NBFCs to decrease the risk.
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The global rating agency, Moody’s, upgraded India’s ratings from ‘Negative’ to ‘Stable’. The agency also noted that India’s foreign-currency and local-currency long-term issuer ratings and the local-currency senior unsecured rating stood at Baa3.
The report read, “The decision to change the outlook to stable reflects Moody’s view that the downside risks from negative feedback between the real economy and financial system are receding.” It also noted that higher capital cushions and greater liquidity have helped the banks and NBFCs to decrease the risk to the sovereign.
The agency expects that the economic environment in the country, with the upcoming festive season and the increasing pace of Covid vaccines, will help in gradually decreasing the fiscal deficit.
Activity Picking Up
The report also said, “An economic recovery is underway with activity picking up and broadening across sectors.” According to the rating agency, after a contraction of GDP by 7.3 per cent in FY 2020, it expects India to grow by 9.3 per cent in FY21. In FY22, the GDP growth figures, according to Moody’s, will be at 7.9 per cent.
“The growth projections take into account structural challenges, including weak infrastructure, rigidities in labour, land and product markets that continue to constrain private investment and contribute to post-pandemic economic scarring. The government announced reforms throughout the pandemic that include measures aimed at increasing the flexibility of labour laws, raising agricultural sector efficiency, expanding investment in infrastructure, incentivizing manufacturing sector investment and strengthening the financial sector. If implemented effectively, these policy actions would be credit positive and could lead to higher potential growth than expected”, Moody’s said in the report.
Reforms can help in further upgrade
If the growth potential of India increased materially beyond its expectations, the rating agency may further upgrade the country’s ratings. According to Moody's, the growth potential can be improved with the help of financial sector reforms that lead to a jump in private investment. The muted private consumption expenditure and investment have been the main reasons for the slow recovery of the Indian economy post-COVID.
The government and RBI have taken various measures, including keeping the interest rates low, to encourage private expenditure. With the improvement of consumer sentiment due to the upcoming festive season, it is expected that the figures of the third quarter will be more encouraging than the previous two quarters of the year.