Positive investor sentiment, which got a
boost in the run-up to the Lok Sabha polls, is likely to be sustained
following the thumping victory of the BJP-led National Democratic
Alliance, Moody's Investors Service said today. Any change in India's
sovereign credit profile hinges upon the government's fiscal position,
regulatory constraints on investment and output and growth in social and
physical infrastructure, the rating agency said. It assigns a 'Baa3'
rating to India, signifying moderate credit risk, with a stable outlook.
Moody's also projected a downside risk to 5 per cent GDP growth this
year. "The significant parliamentary majority won by the BJP-led NDA in
India is likely to sustain the investor sentiment which has recently
boosted equity indices and the rupee," Moody's said in a note. The NDA
is expected to win over 330 seats in the recently concluded elections
for 543 seats in the 16th Lok Sabha. While policy measures to revive
the economy are likely over the coming months, India's growth, fiscal
and inflation metrics are unlikely to improve immediately, Moody's said.
"We expect GDP growth to continue to be below potential, at about 5
per cent this year, and the possibility of a sub-par harvest due to El
Nino effects poses downside risks," it said. The agency said the impact
of election results on the country's credit profile will be apparent
over the next several months as economic policy measures are
implemented. In the medium term, the extent to which these steps revive
the economy will depend on the specific measures adopted by the new
government and the pace of their implementation, it added. The BSE
Sensex has gained more than 17 per cent in the past three months on
expectations the BJP would win a considerable majority and pursue
policies conducive to investment and economic growth. Foreign portfolio
inflows appear to have helped drive this increase, as well as a 4 per
cent appreciation of the rupee against the US dollar since the beginning
of the year. "However, economic trends will take longer to improve
than sentiment did," Moody's said. Industrial output declined 0.5 per
cent in March, while retail inflation remained elevated at 8.6 per cent
in April, limiting the scope for monetary stimulus to revive growth.
"Nonetheless, industrial momentum could pick up in the second half of
the year as stalled investment resumes and consumer confidence
increases," Moody's said.
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