Moody's Backs India's Stable Rating

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NEW DELHI—Moody's Investors Service said Monday it is maintaining its 'stable' outlook on India's sovereign rating as the growth slowdown and deteriorating business sentiment in the economy are likely to be temporary.

India's central bank raised the foreign investment cap on government bonds; Japanese Prime Minister is facing an open revolt within his party; Shares in Samsung tumbled and HTC pulled out of Brazil.

The decision would give the Indian government the much-needed respite as it faces heat due to a cut in outlook to 'negative' from 'stable' by Standard & Poor's in April and by Fitch last week, reflecting fading investor confidence triggered by worsening conditions in the economy.

Standard & Poor's and Fitch had warned that India could lose its investment grade rating if swift measures weren't taken to revive investment climate and boost growth in the economy.

India's fiscal deficit has ballooned, while slowing exports--even as imports continue to rise--have sharply stretched its current-account deficit, sending the rupee to all-time lows against the U.S. dollar.

The dollar was last trading at 56.42 rupees, off its record-high of 57.33 rupees hit Friday.

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Moody's said India's Baa3 rating already reflected challenges such as a weak fiscal performance of the government, high inflation and an uncertain investment policy environment, which have characterized the economy for decades.

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A labourer carries a cement bag before loading it onto a truck at a railway goods yard, on the outskirts of the western Indian city of Ahmedabad in this June 1, 2012 photo.

"Certain recent negative trends -- such as lower growth, slowing investment and poor business sentiment -- are unlikely to become permanent or even medium-term features of the Indian economy, although global and domestic factors, including potential shocks in agriculture, could keep India's growth below trend for the next few quarters," Moody's said in a statement.

Moody's said the slowdown in growth and high inflation will hurt India's credit profile, but not enough to lead to a revision in its rating.

India's limited foreign currency debt is also likely to shield the government from any significant increase in its external debt burden due to the sharp fall in the rupee, the ratings firm added.