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India, facing the threat of a sovereign ratings downgrade due to worsening macroeconomic parameters, has got some respite from Moody’s Investors Service.
In its latest report, the global rating agency said the structure of the government’s debt supported the current ratings, even as macroeconomic factors had worsened.
Moody’s and its peers, Standard & Poor’s and Fitch, have assigned their lowest investment rating to India. Any further downgrade would club the economy with junk-grade countries.
However, risks from worsening macroeconomic factors might make it difficult for the system to absorb government debt, Moody’s warned. It, though, is not basing its ratings on this factor as of now, but is monitoring it.
“(The) government debt... is largely owed domestically, in rupees, at relatively low real interest rates and at long tenors...(this) has mitigated the credit challenges stemming from India’s high fiscal deficits and large government debt burden during a period of currency volatility and rising interest rates,” Moody’s said.
Atsi Sheth, a Moody’s vice-president and senior credit officer, said even as macroeconomic imbalances had heightened in recent years, these factors had supported India’s sovereign credit profile and Baa3 rating. This rating is the lowest one for investment given by Moody’s to India.
She said, “Interest rates paid on Indian government debt have been significantly lower than India’s gross domestic product growth rate. This interest-growth differential has lowered the government debt-GDP and government interest payments-government revenue ratio over the last decade, despite wide fiscal deficits.”
As interest rates have increased and growth slowed in the past three years, India’s interest-growth differential has narrowed, yet remains more favourable, said Sheth.
According to the government Budget papers, it was to repay Rs 12,753 crore during the first half of the current financial year, with coupon rates of nine per cent and 9.81 per cent. Even at the latter, the real coupon rate came to 4.08 per cent, given the average wholesale inflation rate of 5.73 per cent. This is slightly lower than the 4.6 per cent growth rate during April-September 2013.
Moody’s said if the current lower growth and high inflation persisted over the medium term, the domestic financial system’s capacity to absorb government debt could fall considerably. “This could change the structure of government debt, raise debt financing costs and weaken government debt ratios.”
The report said such a development was not Moody’s base case forecast at this time but a risk the agency was monitoring.
It noted the government’s debt financing profile benefited from an increase in India’s domestic savings during the previous years of high GDP growth, as well as from capital controls and bank liquidity requirements which channel a portion of private savings into government debt.
India’s domestic savings rate hasn’t gone below 30 per cent of GDP after 2003-04.
Besides, Moody’s said foreign currency debt and debt owed to non-residents was a relatively small portion of Indian government debt.
“Therefore, currency volatility and global risk aversion has a more limited impact on Indian government debt service costs than in countries where reliance on external debt is higher,” Moody’s said.
