New Delhi: Ratings agency Moody's Tuesday said India's credit outlook is stable but cautioned that high fiscal deficit and persistent inflationary pressure would continue to pose challenge for the economy.
The rating agency said that the 'Baa3' sovereign rating is supported by credit strengths which include a large, diverse economy, strong GDP growth as well as savings, and investment rates.
"The rating is constrained by the credit challenges posed by India's poor social and physical infrastructure, high government deficit and debt ratios, recurrent inflationary pressures and an uncertain operating environment," Moody's said in its 'Credit Analysis on India'.
The rating has also been constrained due to the country's "complex regulatory environment" and a tendency towards inflation, it said, adding that fiscal position has long been a constraint for rating.
The government aims to restrict the fiscal deficit to 5.3 percent of GDP this fiscal. It has also announced a slew of measures to spur infrastructure development and liberalised foreign direct investment norms.
"However, given the delayed timing and still modest scope of these measure, growth may remain subdued in the near term amid continued domestic political uncertainty and a global slowdown," Moody's added.
Moody's said persistent domestic inflation and wide fiscal deficits precluded domestic policy loosening to combat the global growth downturn over the last year.
The agency said its stable outlook on India's rating is based on "our expectations that India's structural strengths -- a high household savings rate and relatively competitive private sector – will ultimately raise the GDP growth rate from around 5.4 percent in FY 2013 to 6 percent or higher in FY 2014..."
In October, Standard & Poor's had said there was one in three likelihood of rating downgrade for India within 24 months if the economic growth prospects dim, its external position deteriorates, its potential climate worsens, or fiscal reforms slow.
Earlier in April, S&P had changed the rating outlook of India from stable to negative, reflecting the possibility of a downgrade.
The government's annual deficits tend to be among the highest within the Baa range, and have proven relatively more vulnerable to growth downturns due to elastic revenues and rigid expenditures, it said.
Although absolute debt levels have risen steadily, the government's debt to GDP ratio has been declining over the last few years, it said.
Moody's assessment of low government financial strength is based on its expectation that the government's debt and interest payment burden will remain high relative to its annual revenues over the medium term.
However, Moody's cautions "that unanticipated domestic political turmoil, a further worsening in global growth and financial conditions, or a surge in food and other commodity prices could all affect the pace and timing of the recovery".
Last week, Moody's had projected Indian economy to have grown by little more than 5.5 percent in last quarter, and said an initial spike in investor sentiment after recent reforms has faded and the "reality of India's deep-seated structural problems" has begun to set in.
The country's GDP numbers for July-September quarter is scheduled to be announced on November 30.