New Delhi, May 18 (IANS): Global financial services provider firm Moody's Analytics said India's economy is back on track after the pandemic and it does not expect the military conflict (in Ukraine) to derail the recovery.

Several months into the conflict, fears over the impact have moderated.

"Following a robust rebound of over 9 per cent in the year ending March 2022 (fiscal 2021), we expect real GDP to grow 8.2 per cent in fiscal 2022, the fastest expansion among G20 countries globally and partly reflecting ongoing base effects from pandemic-led disruptions," it said in a report.

The buoyant economy creates favourable operating conditions for the country's banks, besides their loan performance and profitability are improving, albeit from a low base. Capital and liquidity levels are also stable.

The global economic fallout from the Russia-Ukraine military conflict will push up inflation and interest rates in India, and create supply constraints, it said.

India, as an agricultural economy, is a net food exporter but depends on significant agricultural imports such as palm oil.

"Higher food prices will therefore directly affect inflation, while soaring fuel prices will have an even larger adverse impact. India's Consumer Price Index (CPI) was 6.1 per cent before the conflict and had risen to 7 per cent in March."

Indian banks, however, are in better shape now than before the pandemic. Loan quality had deteriorated over the prior decade as a large proportion of the banks' corporate lending books turned sour. Corporate stress at that time was linked to multiple factors including slowing economic growth, over-indebtedness and poor governance.

Since then, the banks have cleaned their balance sheets and non-performing loans (NPLs) are falling as a result.

"The asset-weighted average of rated banks' gross NPL ratios nearly halved to 5.7 per cent as of December 31, 2021 from a peak of 10.3 per cent at end of March 2018."

The report said it expects the NPLs to decline further as banks make recoveries or write off legacy problem debt, while formation of new NPLs will be stable as the economy recovers.

"Loan growth will also help push NPL ratios down by expanding the overall pool of loans, even though new defaults may arise from loans that have been restructured because of pandemic-related economic disruption."

This year, consumer and business confidence is improving and domestic demand is up.

A decline in loan-loss provisions as NPLs fall and an increase in net interest margins as interest rates rise will boost banks' profitability, while capital, funding and liquidity will be stable and support the overall loan growth, the report further said.