Credit ratings agency Moody's has said India's below normal monsoon is unlikely to impact its credit rating while asserting that government policy action and reforms going forward will be key to an upgrade.
For the second successive year, monsoon is likely to be below normal - at 93 per cent this year - with parts of north-west and central India to be the most affected, according to an official forecast by the India Meteorological Department.
Moody's Sovereign Rating Analyst Atsi Sheth said that rating action on India is unlikely to depend on one particular monsoon, although a "monsoon shock" represents a near-term risk.
"What the rating currently incorporates is policies to address these vulnerabilities to monsoon. India is unique among countries in the impact that drought tend to have on inflation and growth. Our expectation is that slowly policies will be put in motion to address these vulnerabilities over the coming years. So, the rating will be impacted by inability to pursue those policies, in terms of irrigation, infrastructure, food distribution," Sheth said.
Stating that a rise in inflation could pose a potential risk, Sheth said that a growth rate of more than 7.5 per cent may not be "sustainable" for India in the present scenario and the country needs to resolve tax issues that are impacting its investment climate.
Moody's has a 'Baa3' rating on India, with a positive outlook.
"India needs to reduce the regulatory constraints with regard to investment. One of the reason why you have high inflation in India is demand is high but supply is not able to meet the demand and that is because investment is constrained by regulation," Sheth said.
She, however, outlined that political shifts reversing policy efforts, sharp rise in commodity prices could act as risk to rating outlook.
"What is positive for India is political willingness to take a longer term reform measures. 7.5 per cent growth rate for current fiscal is a good growth and in present scenario higher than 7.5 per cent is not sustainable," Sheth said.
Policy efforts should be towards lowering inflation, improving infrastructure and regulatory environment and fiscal consolidation.
ICRA Senior Economist Aditi Nayar said she expects that average retail inflation in 2015 to be 5.5 per cent and RBI could possibly go in for an interest rate reduction in August.
Hailing India's inflation targeting as 'credit positive', Sheth said: "If monetary policy response is to allow inflation to rise that would be negative".
Under Monetary Policy framework agreement between the central bank and government, the RBI will first aim to have consumer inflation fall below 6 per cent by January 2016.
Sheth underlined the need for resolving the tax issues saying "uncertainty on tax issues is a deterrent to investment climate."