NEW DELHI: Rating agency Standard & Poor’s (S&P) on Friday said a serious local outbreak of coronavirus epidemic in India could hit expectation of a quicker turnaround in the country’s growth trajectory starting FY22, thus exerting downward pressure on India’s sovereign rating.
The rating agency on Wednesday retained India’s lowest investment grade (BBB-) credit rating with stable outlook expecting the country’s economy and fiscal position to stabilize and begin to recover from 2021 onwards.
“Risks include a serious local epidemic, enduring financial and corporate distress in India, and long-lasting global economic malaise. Such risk scenarios may involve a comprehensive review of our assumptions of the sovereign. Expectations for a strong rebound may change if this crisis has a more chronically debilitating effect on Indian growth than we now assume,” it said in a report.
S&P’s assessment comes on a day India surpassed UK in total covid-19 patient count to become the fourth worst-affected nation in the world as the country added a record 10,000 patients on Thursday.
“We expect the speed of India’s post-crisis recovery to have long-term implications for the sovereign credit rating,” it added.
S&P expects the Indian economy to strongly recover in FY22 and grow at 8.5% following its projection of 5% contraction in the current financial year.
Though the government has started unlocking two-month long restrictions to restart economic activity, S&P said India’s economic reopening will require momentous coordination between public and private sectors. “The country will find it difficult to resume production following an extended period of government-mandated, nationwide lockdown introduced in March 2020. Economic activity will likely only meaningfully improve around the end of calendar 2020,” it added.
The rating agency said Indian banks entered the crisis from a position of weakness and although they have been on the recovery path for the past 12-18 months, the acute economic downturn will defer the improvement by a year.
“In the interim, we expect Indian banks’ asset quality to deteriorate, credit costs to rise, and profitability to decline. Should these conditions prevail beyond fiscal 2021, continued risk aversion, particularly from the more selective private sector banks, could stymie credit growth. This would put yet another brake on the economic recovery,” it added.