Moody’s Investors Service on Tuesday changed the outlook on India’s sovereign ratings to ‘stable’ from ‘negative’. However, it retained the ratings, both of foreign and domestic currencies, at the lowest investment grade.

“The decision to change the outlook to stable reflects Moody’s view that the downside risks from negative feedback between the real economy and financial system are receding. An economic recovery is underway with activity picking up and broadening across sectors,” said Moody’s.

With this, two ratings agencies — Moody’s and Standard & Poor’s — have a stable outlook on their ratings on India, while Fitch has negative outlook. All three rating agencies have given India the lowest investment grade.

Moody’s said with higher capital cushions and greater liquidity, banks and non-bank financial institutions pose much lesser risk to India than Moody’s previously anticipated.

And while risks stemming from a high debt burden and weak debt affordability remain, Moody’s expects that the economic environment will allow for a gradual reduction of the general government fiscal deficit over the next few years, preventing further deterioration of the sovereign credit profile.

In Moody’s lexicon, India has Baa3 ratings. It said retaining of the ratings balances India’s key credit strengths, which include a large and diversified economy with high growth potential, a relatively strong external position, and a stable domestic financing base for government debt, against its principal credit challenges, including low per capita incomes, high general government debt, low debt affordability and more limited government effectiveness.

India’s long-term local-currency (LC) bond ceiling remains unchanged at A2 and its long-term foreign-currency (FC) bond ceiling remains unchanged at A3.

The four-notch gap between the LC ceiling and issuer rating reflects limited political event risk that would significantly disrupt the economy and modest external imbalances, balanced by a large government footprint in the economy and limited predictability and reliability of government policies.

The one-notch gap between the LC and FC ceiling reflects limited external indebtedness and that, despite a history of several forms of capital controls, a debt moratorium remains unlikely.

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