MUMBAI (Reuters) - S&P Global Ratings said on Friday its outlook on India's sovereign debt remained stable, even though surging COVID-19 cases could threaten the strong economic recovery it has seen so far.
The rating agency, however, said the second wave should not hit the economy as hard as the first wave did in the April-June quarter of the 2020/21.
"India's second COVID wave may derail a strong recovery in the economy and credit conditions," S&P said.
"Our downside scenarios suggest a less robust recovery in government revenues, and the severe downside scenario may entail additional fiscal spending," they added.
The agency, however, said it still expects the economy to expand for the year as a whole, even though it said there are downside risks to its current baseline projection of 11% growth.
It expects growth to fall to 9.8% under its moderate scenario and to 8.2% under the severe scenario based on when the current infection wave peaks.
"Our outlook on India's sovereign rating remains stable which suggests that we do not expect there to be change in the rating level over the next two years. Currently that does remain the case," said Andrew Wood, director, sovereign & international public finance ratings.
"Of course there are going to be at the very least some near-term ramifications on India's economy stemming from the severe second wave of COVID-19 and that may feed through into the sovereign credit metrics," he added.
S&P has a "BBB-" rating on India, its lowest investment grade, with a steady outlook.
S&P said the pace of recovery in India after the current COVID-19 peak has passed and the government's fiscal position will be crucial in determining the country's sovereign credit rating going ahead.
"If it (fiscal position) becomes acute enough and on a more sustained basis, then we could have more concerns regarding sustainability of the public finance situation," Wood said.
(Reporting by Swati Bhat; Editing by Kim Coghill)