Global risks ‘threaten India’s growth’

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Market concerns over India’s economic exposure to external risks have risen since last summer, reports Moody’s Investors Services.

The credit ratings agency (CRA) and its Indian affiliate, ICRA Limited, conducted its latest poll in Mumbai earlier this month.

“The market participants we surveyed are increasingly concerned about the potential spillover on India’s growth story of external risks such as interest rate tightening in the US and China’s ongoing slowdown,” says Rahul Ghosh, a Moody’s vice president (VP) and senior research analyst.

Asked what they regarded as the greatest risk to India’s macroeconomic growth over the next 12-18 months, 35% saw external shocks as the greatest challenge facing the economy, up from just 10% for the previous Moody’s/ICRA poll last May.

“However, the result is more likely a reflection of the broad-based spike in global risk aversion, rather than India’s relative vulnerabilities,” adds Ghosh. “Investors see India as much better placed in terms of growth than most of its similarly rated emerging market peers, such as Indonesia, Turkey, Brazil, South Africa and Russia.”

Ghosh was speaking on Moody’s just-released report, titled ‘India Credit – Heard from the Market: India Not Immune to External Risks’, which discusses results from polls conducted at Moody’s/ICRA’s India Outlook Conference in Mumbai on 13 January. The event attracted 110 market participants.

The same poll found that 32% thought sluggish reform momentum will be the largest threat to India’s gross domestic product (GDP) growth, down from 47% in May 2015. By contrast, 19% said infrastructure constraints were the most important factor, against 38% previously.

Asked to predict India’s economic growth rate, more than three quarters of those surveyed said headline GDP growth will stay between 6.5% and 7.5% over the next 12 to 18 months. Only 14% of participants expected growth to reach between 7.5% and 8.5%, against 36% of respondents surveyed last May.

Moody’s baseline growth outlook for India mirrors the majority view of the market participants surveyed. The CRA projects a full year real GDP growth of 7.0% in the fiscal year ending 31 March 2016, rising to 7.5% in the next year.

On the asset quality of Indian banks, market participants polled were split on whether government initiatives will help improve the banks’ asset quality, with 40% expecting a reduction in weak assets in the coming 12-18 months compared with 45% who believe asset quality is unlikely to improve.

Nevertheless, there was a clear consensus on expectations of further weakness for public-sector banks, with 89% expecting single digit loan growth for these banks, due to capital constraints.

Last November, Moody’s changed its outlook on India’s banking system to stable from negative, as it expects a gradually improving operating environment to result in a slower pace of problem loan creation and, as a result, the credit metrics of Indian banks will stabilize gradually. However, the CRA adds the capital buffers for public-sector banks will remain thin, with common equity tier 1 ratios typically in the 6%-10% range.

As for Indian corporates, 50% of poll respondents said policy implementation will represent the key driver of credit conditions over the next 12-18 months, and 21% said external risks will constitute the key driver. Asked about private sector investment growth, 58%
said it will recover only gradually through to mid-2017.

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