“The stable outlook reflects our view that India’s contraction in fiscal 2021 will be followed by a significant recovery, which will stabilize the country’s broader credit profile,” S&P said.
The outlook was underpinned by India’s above-average long-term real GDP growth, sound external profile, and policy stability, it said.
This was tempered by vulnerabilities stemming from a low per capita income and consistently elevated general government deficits and indebtedness, it added.
The neutral rating action takes a positive spin in light of a recent downgrade to India’s credit profile by Moody’s in June from Baa2 to Baa3 with a negative outlook.
The latest move leaves India within the last rung of investment grade rating of the three major global rating agencies including Fitch.
Under a heading titled ‘External profile is improving, but fiscal metrics remain the Achilles’ heel’, S&P pegged the combined fiscal deficit at 12.5% of gross domestic product along with public debt at 90% this fiscal.
“…the country’s strong external settings will act as a buffer against financial strains despite elevated government funding needs over the next 24 months”, it added.
Downward pressure to the ratings would come from a significantly slower than expected recovery after the ongoing fiscal and a higher than expected deficit and debt accumulation, the report said.
S&P expects the economy to contract 9% in the ongoing fiscal year with a sharp pick up to 10% in the coming fiscal.
With regards to inflation, the rating agency said the Reserve Bank of India will continue to achieve its inflation target, forecasting inflation to fall back within its tolerance band by the end of this fiscal.