Moody’s: India’s growth projections appear ambitious, USD/INR keeps highs

In its latest report, the US-based Moody's Investors Service said that India’s growth projections appear ambitious amid concerns over the country’s financial sector credit growth.

Key Findings:

"The budget expects nominal GDP growth of 10 percent in 2020-21, followed by 12.6 percent and 12.8 percent in FY2022 and 2023.

But, Moody's saw GDP growth rising to around 8.7 percent in the next financial year beginning April 1 from about 7.5 percent in the current fiscal.

Growth has remained relatively weak as a prolonged deleveraging cycle and ongoing stress among non-banking financial institutions (NBFIs), which has constrained the financial system's overall provision of credit, weigh on consumption and investment.

The significant slowdown in financial sector credit growth from NBFI liquidity constraints and asset quality issues among public sector banks has exacerbated prolonged weakness in private investment and a material decline in consumption, due in part to financial stress among rural households and weak job creation.

These forecasts (made the Budget) appear ambitious given the combination of structural and cyclical challenges that the Indian economy faces.

The government will face challenges in achieving its deficit target for the fiscal year ending March 2021, amid persistent structural and cyclical headwinds to growth."

Gene Fang, a Moody's Associate Managing Director, said: "While the latest budget targets a narrower deficit, prolonged weakness in nominal GDP growth in India, combined with lower revenue collections, has dampened the outlook for fiscal consolidation, raising the risk that the debt burden may not stabilize.”

"The debt burden is sensitive to nominal GDP growth, which we expect will remain lower on average than in the past. In light of India's weak fiscal health compared with its rating peers, any slippage in debt reduction will be credit negative,” Gene added.

FX Implications:

USD/INR holds the higher ground around 71.25, as the Asian currency remains under pressure amid the rebound in oil prices and concerns over the economic impact of the China coronavirus globally.