S&P raises India inflation forecast by 50 basis points to 6.8% for FY23

India is facing the external pressures of higher commodity prices, US dollar dominance, and tightening financial conditions from a position of relative strength: S&P

India has ample foreign exchange reserves to withstand pressure on credit worthiness, S&P Global Ratings said on Thursday, while raising its inflation forecast by 50 basis points to 6.8 per cent for FY23 citing higher commodity prices, rising interest rates and foreign exchange volatility. It kept its growth forecast unchanged at 7.3 per cent for the financial year. 

Speaking at the India Credit Spotlight 2022 webinar, S&P Sovereign & International Public Finance Ratings Director Andrew Wood said the country had a strong external balance sheet and limited external debt, making debt servicing not so expensive.

"The country has built up buffers against cyclical difficulties like those, which we are experiencing right now," Wood said.

The Reserve Bank of India (RBI) in its latest policy meeting kept the inflation forecast unchanged at 6.7 per cent for FY23. “Inflationary pressures re-emerged on energy price increases and economic reopening, but the latest July reading showed some stabilisation. Recent global oil price declines will alleviate pressure on energy prices as well as on the current account,” said the report.

The Monetary Policy Committee of the RBI in its last policy review raised the policy rate by 50 basis points to 5.4 per cent, remaining focused on withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth.

“The RBI is likely to continue tightening monetary policy to manage inflation expectations,” said Vishrut Rana, economist at S&P Global Rating. “We predict the benchmark policy rate to rise to 5.65 per cent by end FY23 with upward risks attached,” he added.

While providing insights about India’s sovereign rating, S&P said India was facing the external pressures of higher commodity prices, US dollar dominance, and tightening financial conditions from a position of relative strength.

“India is expected to witness higher current account deficit for a longer period of time on the back of higher commodity prices, rising import bill and weakening of exports,” said Wood, adding, “We are expecting these pressures to cool off over the remaining duration of FY23,” he added.

The rating agency said the Indian banking sector will continue to solidify its position despite the headwinds in terms of rising interest rates, elevated inflation and exchange rate volatility.

Neel Gopalakrishnan, lead analyst, director, corporate ratings, said the operating environment for the companies still remains supportive and the credit profiles of most rated entities are quite resilient due to comfortable liquidity position and increased revenues. “There is a deleveraging trend being witnessed in these rated entities since the last two years. We expect the improvement in earnings of these entities is sustainable and is supportive of deleveraging going forward,” he added.

On the infrastructure sector, S&P said rising capital expenditure in the renewable energy sector had exposed it to hardening interest rates. “The airport sector requires limited refinancing but still inflation could bite,” the rating agency said.