India’s market concerned external risks may affect economic growth – Moody’s poll

India’s market concerned external risks may affect economic growth – Moody’s poll

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India’s economic exposure to external risks has risen over the past seven months and market participants are concerned about the country’s growth in the next 12-18 months, Moody’s Investors Service said on Friday in a press release about a poll it conducted with its Indian affiliate ICRA.

The poll covers 110 of India’s major investors, intermediaries and issuers and was conducted in Mumbai in mid-January 2016.

The majority of poll participants, or more than three quarters, said they expect India’s GDP growth to stay between 6.5%-7.5% over the next 12-18 months, followed by 14% of the interviewees who said they expect GDP growth to reach 7.5%-8.5%.

Moody’s said it also sees India’s real GDP growth rate at 7.0% in the fiscal year ending 31 March, 2016, reaching 7.5% in the next fiscal year.

External shocks are the greatest challenge that India’s economic growth is expected to face in the next 12-18 month, according to 35% of the survey participants. In comparison, Moody’s and ICRA’s previous poll from May 2015 showed just 10% of the market participants saw external shocks as a risk for the country’s economy.

“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,” said Rahul Ghosh, vice president and senior research analyst at Moody’s. “”However, the result is more likely a reflection of the broad-based spike in global risk aversion, rather than India’s relative vulnerabilities,” he noted, adding that Indian investors are in a better position in terms of growth than other emerging markets with a similar rating (Baa3+), including Indonesia, Turkey, Brazil, South Africa and Russia.

Meanwhile, 32% of the poll participants said their largest concern regarding India’s GDP growth is sluggish reform momentum and 19% of the interviewees pointed infrastructure constraints as the main threat to the country’s economic growth, down from 47% and 38%, respectively, in the previous poll.

When asked about Indian banks’ asset quality, 45% of the market participants said they expect no improvement in the next 12-18 months, while 40% expect reduction in weak assets. Meanwhile, 89% of the interviewees said banks in the public sector are expected to see an increase by just a single digit in loans, due to capital constraints.

For half of the poll respondents, policy implementations will be the key driver to India’s credit conditions for companies in the next 12-18 months, while for 21% the key driver will be external risks.

Moody’s expects banks in the private sector to face thin capital buffers, with Common Equity Tier 1 ratios in the 6%-10% range.

In November 2015, Moody’s upgraded India’s banking system outlook to stable from negative because of the gradual improvement in the operating environment. It said at the time the stable outlook is based on the assessment of five drivers – operating environment (improving); asset risk and capital (stable); funding and liquidity (stable); profitability and efficiency (stable); and government support (stable).

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