K.R. Srivats

New Delhi, Aug 4 The Indo-US nuclear deal could lend medium-term support to India’s sovereign ratings, said international credit rating agency Moody’s Investors Service even as it cautioned that “it was unclear whether this may materialise quickly or smoothly enough to offset prolonged fiscal policy shortcomings”.

The rating agency also warned about escalation in downside pressures on India’s stable ratings outlook as there were risks on the horizon. Policy as well as market interest rates could rise due to macro-economic adjustment undertaken by monetary authorities and a sharp deceleration in growth may follow, said Moody’s in its latest report on India’s sovereign ratings, released in Hong Kong today.

Moody’s saw increased pressure for a change in India’s sovereign ratings outlook – from stable to negative — if the fiscal policy response remained inadequate amidst heightened external shocks like the one from crude oil.

Although there were support factors like nuclear deal and winning of trust vote in Parliament, Moody’s said that these factors would be weighed against more imminent challenges like worsening fiscal situation, primarily derived from external shocks, and the lack of a more prudent, flexible and resilient fiscal framework.

Even as the risks confronting the Indian economy had grown, Moody’s said that it was not yet to the extent that the Government’s Baa3-foreign currency and Ba2-local currency ratings were threatened.

With wholesale price index (WPI) based inflation close to 12 per cent, Moody’s has said that this may also contribute to further hesitancy in pushing ahead with structural fiscal reforms.

It noted that there was deep political unwillingness in pushing forward with structural fiscal reforms that introduces market forces into product pricing mechanisms. Moody’s warning comes weeks after Fitch Ratings, another global credit rating agency, downgraded India’s local currency outlook from ‘stable’ to ‘negative’.

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