Although the government has shielded consumers from the global energy price rise — the pump price of petrol and diesel has not changed — resulting in headline retail inflation in March only rising marginally to 3.4% from 3.21% in February. (Image generated using AI)
Warning that a “more prolonged disruption” in economic activity in the Gulf region will hurt the flow of remittances into India and widen the country’s trade deficit, Moody’s Ratings has said the government’s ability to “maintain investor confidence and manage macroeconomic trade-offs” will be crucial to preserving credit stability. At the same time, it said India’s external position remains “relatively sound” given the large foreign exchange reserves, low external debt, and limited reliance on cross-border financing. Further, investment activity should be supported by the government’s “sustained emphasis” on infrastructure spending and a gradual relaxation of trade barriers.
The comments by the ratings agency, in a report dated Monday, come after it lowered its GDP growth forecast for India to 6% from 6.8% for 2026-27 earlier this month. At 6%, the agency’s growth forecast is significantly lower than the Reserve Bank of India’s (RBI) projection of 6.9%.
Moody’s has a Baa3 rating on India – the lowest investment grade rating – with a stable outlook.
“A prolonged disruption would pose more material challenges, potentially entrenching inflation, straining fiscal and monetary policy flexibility and testing external investor confidence. The effectiveness and timeliness of policy actions will remain central to preserving macroeconomic and credit resilience amid this external shock,” Moody’s analysts said.
The war in West Asia has exerted heavy pressure on the Indian rupee’s exchange rate, which tumbled past the 92- 93-, 94-, and 95-per-dollar levels in quick succession in March as foreign investors dumped Indian assets amid spiralling crude oil prices and a strengthening US dollar. While the rupee has gained some ground since then due to measures taken by the RBI — it closed at 93.5 per dollar on Tuesday — Foreign Portfolio Investors (FPIs) continue to sell Indian shares and debt heavily. After selling $13.6 billion worth of Indian debt and equity in March, FPIs have net sold $6.2 billion so far in April.
Last week, RBI Governor Sanjay Malhotra said in a speech at Princeton University that the West Asia crisis “particularly impacts” India as the region contributes about 50% of our crude oil imports, 40% of our fertiliser imports, and almost 40% of our inward remittances. As such, if the supply disruptions continue for long, then the initial supply shock “can become embedded in the general price level”, Malhotra had said.
These views were somewhat echoed by Moody’s and it added that fertiliser and cooking gas shortages will hamper two key pillars of the Indian economy – agricultural activity and household consumption. And given India’s reliance on West Asia for nitrogen-based fertilisers, “supply disruptions will likely amplify price pressures and threaten agricultural production and food security”.
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Although the government has shielded consumers from the global energy price rise — the pump price of petrol and diesel has not changed — resulting in headline retail inflation in March only rising marginally to 3.4% from 3.21% in February, producers have seen an increase in costs. Data released last week showed India’s wholesale inflation surged to a 38-month high of 3.88% in March due to a sharp increase in prices of petroleum products, with the wholesale price of ammonia jumping 22% month-on-month – its largest-ever sequential increase as per commerce and industry ministry data going back till 2012. Economists expect producers to soon pass on these higher costs to consumers.
While unchanged pump price of petrol and diesel has contained the price shock for consumers, the cost pressures have only been shifted to the oil marketing companies (OMCs) “in a manner we view as unsustainable”, Moody’s said, adding that if energy prices remain higher for a prolonged period of time, it will weigh on consumer and market sentiment and constrain demand.
“Higher government spending on fuel and fertiliser subsidies is likely to weigh on fiscal consolidation efforts at a time when fiscal policy is anchored on gradual debt reduction,” it added.
