Moody’s Investors Service has revised the outlook on India’s sovereign rating to ‘stable’ from ‘negative’, citing receding risks to the economy, particularly from weakness in the financial sector. The rating remains unchanged at the lowest investment grade of Baa3.

Moody’s had pared its outlook on India’s to negative in November 2019, amid a slowing economy. The other two large agencies—Standard & Poor’s and Fitch Ratings—have a stable outlook on the Indian economy.

“The decision to change the outlook to stable reflects Moodyʼs view that the downside risks from negative feedback between the real economy and financial system are receding,” the rating agency said in a release on Tuesday. “With higher capital cushions and greater liquidity, banks
and non-bank financial institutions pose much lesser risk to the sovereign
than Moodyʼs previously anticipated.”

The rating agency said while risks from a high sovereign debt burden remain, an improvement in economic conditions will gradually ease concerns.

Moody’s sees India’s real GDP surpassing 2019 levels this fiscal year, with growth expected at 9.3% this fiscal and at 7.9% next year.

“Downside risks to growth from subsequent coronavirus infection waves are mitigated by rising vaccination rates and more selective use of restrictions on economic activity, as seen during the second wave,” it said.

Moodyʼs expects real GDP growth to average around 6% over the
medium term, reflecting a rebound in activity to levels close to potential output.

According to the rating agency, the government has announced reforms, including flexibility of labour laws, raising agricultural sector efficiency, expanding investment in infrastructure, incentivising 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.”

Commenting on India’s ESG score, Moody’s said this score is highly negative (CIS-4), reflecting the country’s “highly negative environmental and social risks, along with moderately negative governance”.

• Indiaʼs ‘highly negative’ exposure to environmental risks relates to very high exposure to physical climate, water and pollution risks.

• Exposure to social risk is also ‘highly negative’, driven by risks related to low and unevenly distributed incomes, unequal access to high-quality education, strains on housing, healthcare and basic services provision.

• Governance is ‘moderately negative’, due to weakness in policy effectiveness which hampers the sovereignʼs capacity to respond to negative environmental and social shocks and trends.