India can manage a potentially larger-than-expected fiscal deficit this year without risking its investment-grade rating, as rising energy prices are expected to only temporarily strain the country’s budget, according to Moody’s Ratings.
“We don’t see India as being particularly affected because this shock is largely negative for most sovereigns,” said Christian de Guzman, Singapore-based senior vice president at Moody’s Ratings.
India has a steady outlook and the lowest investment-grade tier, Baa3, as per Moody’s. According to de Guzman, the evaluation shows how the government has gradually enhanced its financial situation since the Covid-19 pandemic.
He stated he was certain that New Delhi could continue to cut its budget deficit by taking a prudent stance. From a record high of 9.2 per cent in fiscal 2021, India expects that the deficit will close to 4.3 per cent by March 2027.
This year, concerns about India’s budgetary prospects grew as the Middle East conflict caused crude prices to spike. Growth and the fiscal outlook are at risk due to rising oil prices, which also tend to increase India’s import bill, fuel inflation, and put more pressure on subsidies.
Following the decline in oil prices during US-Iran peace negotiations, the situation has improved in recent weeks. Some policymakers are increasingly optimistic that India’s prospects could be improved by a prolonged de-escalation in the Middle East.
In contrast to a median of less than 10 per cent for similarly rated sovereigns like Italy, Oman, Mexico and Greece, Moody’s projects that interest payments will account for around 23 per cent of federal and state government revenue this year.
Furthermore, the rating agency maintained its prediction that India’s economy will grow by 6 per cent in the year ending in March 2027, based on the assumption that oil prices would average more than $95 per barrel in 2026.
Despite recent advancements in US-Iran negotiations, Moody’s predicts that shipping interruptions across the Strait of Hormuz would continue into autumn, according to de Guzman.
