Japanese ratings agency affirms India's sovereign rating

Japan Credit Rating Agency (JCR) on Monday affirmed ratings for India's sovereign rating at "BBB+" on buoyant economic growth, improving macroeconomic and ample foreign exchange reserves.

However, the ratings are constrained by the bottlenecks to productivity improvement and export growth, notably in infrastructure and business environment.

The ratings agency also flagged looming deterioration of the soundness of public sector banks (PSBs) and strong need for fiscal consolidation.

It has affirmed both long-term foreign and domestic currency issuer rating at "BBB+". The outlook of the ratings is stable. The environment surrounding emerging market economies was increasingly becoming difficult. India also confronts headwinds such as declining exports, a sharp fall in foreign portfolio investment inflow and currency depreciation, JCR said.

Nevertheless, thanks to the fallen oil prices and its carefully calibrated monetary policy, India has seen alleviation in inflationary pressure and the current account deficit. Along with the improving macroeconomic stability, the economy has grown robustly at more than seven per cent year-on-year led by domestic demand, it added.

The central government has been pressing ahead with modernisation of the economic system by improving the business environment and facilitating competition while maintaining fiscal discipline.

The ratings agency said India is a large country with a population of nearly 1.3 billion and inherits the legacy of vested interests and bureaucracy. It is not easy to pursue measures that will require law amendments as the ruling alliance is a minority in the upper house of Parliament.

Moreover, the PSBs, which account for 70 per cent of the total banking system, have seen their non-performing loans surge, making it inevitable for the government to inject capital. In order to sustain robust economic growth for the medium- to long-term, it will be crucial for the government to tackle these structural issues effectively.

JCR will pay attention to the authorities' initiatives and their progress, especially regarding the introduction of a nationwide Goods and Services Tax (GST) and banking reforms.