Global ratings agency Moody's has retained India’s sovereign ratings at 'stable' in its annual credit analysis on the country.
"The Baa3 sovereign rating is supported by credit strengths which include a large, diverse economy, strong GDP growth as well as savings, and investment rates that exceed emerging market averages," the agency said in a statement.
However, poor social and physical infrastructure, high government deficit and debt ratios, recurrent inflationary pressures and an uncertain operating environment remain key challenges, Moody's said.
The reaffirmation of the outlook should come as a relief to the government which is struggling to keep the reform process on track amid stiff political opposition.
Last month, Standard & Poor's warned India still faced a one-in-three chance of a credit rating downgrade over the next 24 months, although it said a series of reform steps launched in September had slightly improved the country's prospects.
Fitch also has a negative outlook on India.
In August, Moody's had lowered India’s growth forecast for 2012 to 5.5 per cent and to below 6 per cent for 2013, blaming the “instability created by a government that has badly lost its way”.
Starting in September 2012, the government has announced measures to spur infrastructure development, allow increased foreign investment, and rein in the fiscal deficit, Moody's said.
However, in Moody's view, given the delayed timing and still modest scope of these measures, growth may remain subdued in the near term amid continued domestic political uncertainty and a global slowdown.
The government's annual deficits tend to be among the highest within the Baa range, and have proven relatively more vulnerable to growth downturns due to elastic revenues and rigid expenditures, Moody's said.
Moody's assessment of low government financial strength is based on its expectation that the government's debt and interest payment burden will remain high relative to its annual revenues over the medium term.
Four weeks ago, Finance Minister P. Chidambaram set himself an ambitious target: to hold the government's fiscal deficit for 2012-13 to 5.3 per cent of gross domestic product, even as sceptical private economists forecast a deficit closer to 6 percent.
But a series of revenue-raising setbacks since October 29 now means it will be almost impossible for the government to meet that target, economists say, and some finance ministry officials privately agree.
The stable outlook on India's rating is based on Moody's expectation that the economy's structural strengths - a high household savings rate and relatively competitive private sector - will ultimately raise the GDP growth rate from around 5.4 per cent in FY 2013 to 6 per cent or higher in FY 2014, with this higher growth improving fiscal and balance of payments metrics.
However, Moody's cautions that unanticipated domestic political turmoil, a further worsening in global growth and financial conditions, or a surge in food and other commodity prices could all affect the pace and timing of the recovery.
(With inputs from Thomson Reuters)