According to reports from The Times of India, Moody's Ratings maintains that India can withstand a potentially wider-than-forecast fiscal deficit this year without jeopardizing its investment-grade rating. The ratings agency assigns India a Baa3 rating, the lowest investment-grade tier, with a stable outlook. Christian de Guzman, Singapore-based senior vice president at Moody's Ratings, stated that "We don't see India as being particularly affected because this shock is largely negative for most sovereigns." The assessment reflects the government's steady progress in repairing its finances since the Covid-19 pandemic.
As reported by The Times of India, earlier this month, Bloomberg News reported that policymakers had been preparing for the fiscal deficit to widen by as much as 50 basis points to 4.8% of gross domestic product in the current financial year-ending March 2027. However, de Guzman didn't specify how much deterioration Moody's would consider consistent with India's current rating. India expects the budget deficit to narrow to 4.3% by March 2027, from a record high of 9.2% in fiscal 2021. Moody's expects the economy to expand 6% in the year through March 2027 while assuming oil prices will average above $95 a barrel in 2026. De Guzman said Moody's remains confident that New Delhi will follow a conservative path on deficit reduction.
According to The Times of India, concerns over India's fiscal outlook intensified this year following a surge in crude prices due to the Middle East conflict. Higher oil prices tend to widen India's import bill, fuel inflation and increase subsidy pressures, posing risks to growth and the fiscal outlook. However, oil prices have eased in recent weeks as US-Iran peace talks progressed, with some policymakers believing a lasting fall in Middle East tensions could help India's outlook. Nagesh Kumar, an external member of the Reserve Bank of India's monetary policy committee, told Bloomberg that the economy could grow by more than 7% this year if global crude prices remain around $70 a barrel. Moody's expects disruptions to shipping through the Strait of Hormuz to persist into autumn despite recent progress in US-Iran negotiations.
As reported by The Times of India, high debt-servicing costs leave India with less fiscal room to respond to economic shocks than similarly rated sovereigns, making debt affordability the country's main credit weakness. Moody's expects interest payments to consume about 23% of federal and state government revenue this year, compared with a median of less than 10% for similarly rated sovereigns like Italy, Oman, Mexico, and Greece. De Guzman noted that "Debt affordability for India is materially worse than all other investment-grade countries." Despite the improving outlook, India continues to face constraints due to elevated debt-servicing costs, which limit its fiscal flexibility compared with other countries carrying similar sovereign ratings.
