MUMBAI: International rating agency Moody's has retained the Baa3 (BBB-) sovereign credit rating for the country with stable outlook, but has warned that Iran war could moderate growth to just about 6% this fiscal and raise inflation risks.
The stable outlook incorporates the gradually improving fiscal metrics since emerging from the pandemic and resilient growth prospects compared with peers. However, fiscal accommodation in the context of the uncertain global macroeconomic outlook, including revenue-eroding measures, can impede progress towards debt reduction and exacerbate already weak debt affordability," Moody's said Monday.
Moody's also predicted an increase in inflation this fiscal, noting that further disruptions could add to the crisis. The agency projects inflation to double to 4.8% in FY27 from 2.4% in FY26.
"Prolonged disruptions, particularly to LPG shipments, would lead to near-term household shortages, higher fuel and transport costs, and spillovers to food inflation through reliance on imported fertilizers. While inflation remains contained for now, geopolitical risks have tilted the inflation outlook to the upside," it warned.
The report notes that the country's economic profile continues to benefit from infrastructure development, digitalisation and financial sector improvements, which have supported a stable post-pandemic recovery.
However, it flags the rising external risks linked to the Iran war that has entered the sixth week and expects GDP growth to moderate to around 6% in FY27 from 7.3% in FY26 and marginally improve to 6.2% in FY28.
"Tactical spending will support growth while the ongoing Middle East war raises fiscal pressures, weighing on the pace of fiscal consolidation," it said.
The agency also highlighted risks to current account deficit and remittance inflows, noting that the Middle East accounts for 37% of inward remittances. Any disruption to employment in the region could affect domestic demand and external financing buffers.
"We also expect the country to face higher import costs as it secures alternative and potentially more expensive supplies of fertilizers and gas. Trade disruptions affecting the Middle East, a key market for country's agricultural exports, will also dampen external demand, further contributing to a widening in the current account deficit," it said.
On the fiscal front, debt burden remains elevated, with general government debt projected to stay above 80% of GDP in the medium-term. And as a result, fiscal consolidation is expected to remain gradual, with the Centre targeting a deficit of 4.3% in FY27, only a marginal improvement from 4.4% in FY26, the agency said.
An upgrade in the rating would depend on sustained improvements in debt affordability and fiscal metrics, while weaker growth or fiscal slippage could exert downward pressure.