Moody's Ratings has stated that India can manage a potentially wider-than-expected fiscal deficit this fiscal year without jeopardizing its investment-grade credit rating, as rising energy prices are expected to only temporarily strain the country's budget.
Fiscal Resilience Amid Global Energy Shocks
Christian de Guzman, Singapore-based senior vice president at Moody's Ratings, said: “We don’t see India as being particularly affected because this shock is largely negative for most sovereigns.” India currently holds a Baa3 rating, the lowest investment-grade tier, with a stable outlook. According to de Guzman, this assessment reflects the government's gradual improvement in its fiscal position since the Covid-19 pandemic.
India's fiscal deficit hit a record high of 9.2% in fiscal 2021 but is expected to narrow to 4.3% by March 2027. De Guzman expressed confidence that New Delhi can continue to reduce its budget deficit through prudent fiscal management.
Oil Price Volatility and Fiscal Outlook
Concerns over India's fiscal prospects grew earlier this year when the Middle East conflict led to a spike in crude oil prices. Higher oil prices typically increase India's import bill, fuel inflation, and put pressure on subsidy expenditures, threatening both growth and the fiscal outlook. However, the situation has improved in recent weeks following a decline in oil prices amid US-Iran peace negotiations. Some policymakers are now optimistic that a prolonged de-escalation in the Middle East could further enhance India's prospects.
Interest Burden and Growth Projections
Moody's projects that interest payments will account for approximately 23% of federal and state government revenue this year, compared to a median of less than 10% for similarly rated sovereigns such as Italy, Oman, Mexico, and Greece. This highlights India's relatively high debt servicing costs.
The rating agency maintains its forecast that India's economy will grow by 6% in the year ending March 2027, based on the assumption that oil prices will average more than $95 per barrel in 2026. Despite recent progress in US-Iran talks, Moody's expects shipping disruptions across the Strait of Hormuz to persist into autumn, according to de Guzman.
