S&P on Wednesday retained India's sovereign rating at 'BBB-' with a stable outlook, saying that while risks to growth are rising, the economy and fiscal position will stabilise and begin to recover from 2021 onwards.

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"While risks to India's long-term growth rate are rising, ongoing economic reforms, if executed well, should keep the country's growth rate ahead of peers," S&P said in a statement.

S&P has forecast India's economy to shrink by 5 per cent this fiscal.

"The stable outlook reflects our expectation that India's economy will recover following the containment of COVID-19 pandemic and the country will maintain its sound net external position," S&P said while affirming India's rating at 'BBB-' and maintaining a stable outlook.

The stable outlook also assumes that the government's fiscal deficit will recede markedly following a multi-year high in fiscal year 2021, it added.

S&P Global Ratings expects fiscal deficit to spike to 11 percent of GDP due to additional expenditure measures to mitigate COVID19 impact. The rating agency also forecasts real GDP growth at 8.5 percent in FY22.

"We could raise the ratings on India if govt significantly curtails its fiscal deficits, resulting in materially lower net indebtedness at general govt level," says S&P.

Downside scenario:

Downward pressure on ratings could emerge over next 1-2 years if:

(1) India's GDP growth fails to meaningfully recover from 2021 onwards, and its trend growth rate falls towards the average of its peers.

(2) net general government deficits materially exceed our forecasts, signifying a weakening of India's institutional capacity to maintain sustainable public finances.

(With PTI inputs)

First Published:Jun 10, 2020 5:40 PM IST