Rating agency Moody's today said emerging economies in Asia Pacific region, including India, have a high degree of immunity to external shocks, but will face challenges when the US Federal Reserve begins raising interest rates.
"A common challenge for emerging economies in the region will come when the US Federal Reserve begins to raise interest rates.
"Asia Pacific sovereigns generally exhibit strong external payments positions and government debt profiles relative to peers elsewhere in the world - factors that should stand them in good stead," Moody's Investors Service said.
It said that most Asia Pacific (APAC) sovereigns have a relatively high degree of immunity to external economic shocks but their ratings momentum is diverging as some drive through ambitious reforms, while others struggle with long-standing challenges.
"A key risk for credit quality is therefore whether governments can deliver on policy pledges," it said. Moody's has a 'Baa3' rating for India, with a positive outlook.
The US Federal Reserve is widely expected to increase interest rates by June or September, a move that would result in a flight of capital from emerging markets, including India. It said as most sovereigns in Asia Pacific are net oil importers, the recent slump in oil prices will have a largely positive impact on the region.
"Savings on energy costs will support sovereigns in their efforts to rein in budget deficits or rebuild fiscal buffers," Moody's noted.
As regards China, it said that slowing growth and a lacklustre global economy would dampen export performance in Asia Pacific in the year ahead, and thus weaken a historically key driver of regional output.
"Commodity exporters in the region will be most adversely affected by China's "new normal" of slower economic growth," Moody's said.
The International Monetary Fund (IMF) has projected that India will overtake China as the fastest growing emerging economy in 2015-16 by clocking a growth rate of 7.5 percent on the back of recent policy initiatives, pick-up in investments and lower oil prices. While India's growth rate is expected to improve from 7.2 percent in last fiscal to 7.5 percent this year and next fiscal, China will witness a deceleration with growth rate sliding from 7.4 percent in 2014 to 6.8 percent in 2015 and 6.3 percent a year after.
Moody's said that household debt remains elevated in several economies around the region, but that does not pose imminent or significant risk to financial system stability. "However, such debt will dampen private consumption growth, which could constrain economic expansion," it said.
Since a significant proportion of retail loans charge variable rates, consumers are directly exposed to rising global borrowing costs, which could amplify pressures on household balance sheets, it added.
Of the Asia Pacific sovereigns that Moody's rates, India (Baa3), Korea (Aa3), Malaysia (A3) and Pakistan (Caa1) have positive rating outlooks, while Mongolia (B2) has a negative outlook.