By Swati Bhat
MUMBAI (Reuters) - Rating agency Standard and Poor's reaffirmed India's long-term sovereign rating at the lowest investment grade for the second time in four months on Friday, and it said it expects the economy to rebound from the impact of the COVID-19 pandemic.
The news keeps India's hopes alive of keeping its coveted investment grade, with two other rating agencies - Moody's and Fitch - having put it on a negative watch at their lowest investment grade ratings earlier this year.
India's long-term foreign and local currency sovereign credit was affirmed by S&P at 'BBB-' with a stable outlook, while the short-term rating was held at 'A-3'.
"The stable outlook reflects our expectation that India's economy will recover following the resolution of the COVID-19 pandemic, and that the country's strong external settings will act as a buffer against financial strains despite elevated government funding needs over the next 24 months," S&P said.
The Indian economy will experience a record contraction in the fiscal year to March 2021 on account of the global COVID-19 pandemic but real GDP will recover significantly in FY22, the ratings agency said.
India has the second highest virus cases globally despite seeing one of the strictest of lockdowns and cases are still rising as the economy gradually opens up.
"We expect economic activity in India to begin to normalize in fiscal 2022, resulting in real GDP growth of about 10%."
The Indian government's direct fiscal support has been limited to 1.2% of GDP so far compared to roughly 3% of GDP on average in other emerging market economies.
S&P noted that the government's reluctance to provide greater direct fiscal support to the economy likely reflects pre-existing fiscal constraints owing to years of high fiscal deficits.
"Although additional stimulus may help to avert a steeper downturn this year, it would also further strain the government's weak finances," it said.
(Reporting by Swati Bhat; Editing by Chizu Nomiyama and Hugh Lawson)