According to the ratings agency, while stronger growth will help counterbalance credit challenges for India, fiscal deficit, inflation and infrastructure metrics are limiting further upward momentum in the sovereign rating
Rating agency Moody's on Wednesday said high fiscal deficit and sticky inflation limit chances of an upward revision in India's sovereign ratings, despite positive growth figures achieved by the economy during the first quarter.
"We forecast fiscal (deficit), inflation and infrastructure metrics to remain weaker than the median for similarly rated peers. While stronger growth in this large and diverse economy will help counterbalance these credit challenges, they limit further upward momentum in the sovereign rating," Moody's Investors Service said in a note.
The comments from the ratings agency come days after the Indian government released first quarter gross domestic product (GDP) numbers at 5.7% and current account deficit (CAD) at 1.7% of GDP.
The Indian government has committed a fiscal deficit target of 4.1% for FY15, but has already exhausted over 61% of the fiscal's target during the first four months itself.
Inflation measured by consumer price index (CPI) continues to skirt around the 8% mark, with upward pressures being exerted by food prices due to weak monsoon.
Moody's, which has a 'Baa3' rating with a stable outlook on India, said the 5.7% GDP print in the April-June period is in line with its "long-held view that growth deceleration to sub-5% levels over the past two years would reverse over time."
The agency further said it is due to this view that it has maintained a "stable outlook" in spite of issues like currency volatility, declining private and public investments and poor market sentiment in the past two fiscals due to adverse tax policies of the previous regime.
Moody's said the higher growth numbers in Q1 will help improve tax revenues and capital flows into the country, and can also help reverse the weakening metrics that have occurred in the fiscal and external position in recent years.
Additionally, Moody's said the macroeconomic outlook will improve if the government is able to "implement policies that ease inflationary pressures and increase infrastructure investment".
The Finance Ministry has been meeting representatives from rating agencies since mid-August to project the positives about the country.
After the release of official data pointing to a 5.7% jump during the first quarter, coming after two consecutive fiscals of sub-5% growth, Finance Secretary Arvind Mayaram had said that he expects some positive action from the international rating agencies.