MUMBAI (Reuters) - S&P Global Ratings will watch the incoming Indian government's fiscal consolidation path for the next two years for a possible sovereign ratings upgrade, an analyst at the ratings agency said on Friday.
S&P raised India's sovereign rating outlook to "positive" from "stable" on Wednesday, citing the country's strong economic fundamentals. However it kept the rating itself at "BBB-".
"Within the next two years, we are closely observing whether the depiction of the government's fiscal consolidation path will carry on," Yeefarn Phua, director - sovereign and international public finance ratings, said in a webinar in answer to a question.
India aims to narrow its fiscal deficit to 4.50% of gross domestic product by the end of 2025/26, from an expected 5.8% in 2023/24.
S&P said that the Reserve Bank of India's surplus transfer to the government for 2023-24 will help it improve its fiscal position.
However, it needs to be seen whether the government uses the funds to reduce fiscal deficit or increase spending, Phua said.
India is able to finance its deficit domestically in its local currency which will come through in the ratings construct going forward, he added.
S&P is also looking at RBI's ability to manage inflation expectations, Phua said.
Indian banks meanwhile are expected to maintain their strong financial performance over the next 12-24 months, hinging on good economic growth momentum in the country, Geeta Chugh, managing director - financial institutions ratings at S&P, said in the same webinar.
Even as deposit growth continues to lag credit growth amid tight liquidity conditions, banks' competition for deposits will be "manageable", Chugh said.
Separately, the RBI's regulatory action on private lender Kotak Mahindra Bank will impact its credit and deposit growth as well as profitability, Chugh said.
However, the bank will be able to manage the impact of RBI's actions on its credit profile, she added.
(Reporting by Siddhi Nayak; Editing by Nick Macfie)
By Siddhi Nayak
