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Fitch Lowers India Rating Outlook

339 days ago

(RTTNews) - Fitch Ratings cut India's rating outlook to Negative on Monday, citing the heightening risk of economic growth deteriorating further if measures are not taken to improve operational environment for business and investment.

The agency is the second among the main credit rating firms to warn India on its economic prospects in recent months. In April, Standard & Poor's had revised the country's rating outlook to Negative saying it sees one in three chances of a rating downgrade.

Lack of political initiative to reduce the widening fiscal gap is a major worry. The latest downgrade to Negative from Stable also reflects India's limited progress on fiscal consolidation, Fitch said.

Such warnings come as the Indian economy faces the multiple threats of increasingly slowing growth and high inflation which leaves little room for interest rate cuts. Earlier today, the Reserve Bank of India left the policy rates unchanged rather unexpectedly on inflation concerns.

The outlook downgrade came a week after S&P warned that India may become the first nation among the BRIC to lose its investment grade.

Meanwhile, Fitch affirmed the sovereign rating at 'BBB-', citing India's diversified economy and its high domestic savings which reduce reliance on foreign investors for private investment and fiscal funding. The 'BBB-' long-term sovereign rating is just one notch above the speculative grade.

"Against the backdrop of persistent inflation pressures and weak public finances, there is an even greater onus on effective government policies and reforms that would ensure India can navigate the turbulent global economic and financial environment and underpin confidence in the long-run growth potential of the Indian economy," said Art Woo, Director in Fitch's Asia-Pacific Sovereign Ratings group.

India faces an awkward combination of slowing growth and still-elevated inflation. The economy expanded 5.3 percent during the quarter ended March 2012, the slowest pace in nine years. Headline wholesale price inflation accelerated to 7.6 percent from 7.2 percent in May led by food and fuel prices.

Fitch trimmed real GDP forecast to rise 6.5 percent for the financial year 2013, down from a previous projection of 7.5 percent. The general government debt stood at 66 percent of GDP at end-FY 2011-12, against the 'BBB' median of 39 percent, it said.

The agency projects wholesale price inflation to rise by an average of 7.5 percent in the financial year 2012-13 which, though lower than the 8.8 percent seen in the prior year, continues to be higher and stickier than Fitch previously expected.

While maintaining status quo today, the Reserve Bank of India said another reduction could worsen the inflationary pressures amid the weakening economic growth.

According to Fitch, India is likely to miss its deficit target of 5.1 percent of GDP in 2012-13 due to weak economic growth and a large subsidy bill. It blamed the government for delaying reforms on tax and subsidy systems.

Although external financial position remains a rating strength, foreign exchange reserves are falling, while net external indebtedness is rising, the agency noted. Prolonged and intensified pressure on the currency and/or foreign reserves would be negative for the credit profile, it said.

Foreseeing politically driven pressure to further loosen fiscal policy in view of the 2014 General Election, Fitch warned that a significant loosening of fiscal policy would leads to an increase in the gross general government debt/GDP ratio and result in a downgrade of India's sovereign ratings.

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