Fitch revises outlook on India to 'stable' from 'negative'

NEW DELHI: Fitch Ratings on Friday revised its outlook on India's long-term foreign currency Issuer Default Rating (IDR) to "Stable" from "Negative" citing diminished downside risks to medium-term growth.

The rating agency has also affirmed India's Issuer Default Rating (IDR) at 'BBB-'.

The Outlook revision reflects our view that downside risks to medium-term growth have diminished due to India's rapid economic recovery and easing financial sector weaknesses, despite near-term headwinds from the global commodity price shock.

We expect robust growth relative to peers to support credit metrics in line with the current rating, Fitch Ratings said in a statement.

High nominal GDP growth has facilitated a near-term reduction in the debt-to-GDP ratio, but public finances remain a credit weakness with the debt ratio broadly stabilising, based on our expectation of persistent large deficits.

The rating also balances India's external resilience from solid foreign-exchange reserve buffers against some lagging structural indicators, it said.

Fitch Ratings noted that the recovery has put the Indian economy on a stronger footing. India's economy continues to see a solid recovery from the COVID-19 pandemic shock.

GDP recovered by 8.7 per cent in the fiscal year ended March 2022, and we forecast GDP growth to remain robust at 7.8 per cent in 2022-23 compared with the 3.4 per cent 'BBB' median, it said.

However, this is a downward revision from our 8.5 per cent forecast in March as the inflationary impacts of the global commodity price shock are dampening some of the positive growth momentum, the rating agency said.

India's strong medium-term growth outlook relative to peers is a key supporting factor for the rating and will sustain a gradual improvement in credit metrics.

"We forecast growth of around 7 per cent between FY24 and FY27, underpinned by the government's infrastructure push, reform agenda and easing pressures in the financial sector.

Nevertheless, there are challenges to this forecast, given the uneven nature of the economic recovery and implementation risks for infrastructure spending and reforms," Fitch Ratings said.

The rating agency noted that the conditions in the financial sector were a key growth impediment before the COVID-19 pandemic but it has improved in recent years.

The improved condition of the financial sector would facilitate better credit allocation and investment in the medium term.

Banks' capital sufficiency will be important in determining their ability to provide more credit, even as regulatory forbearance has given them time to rebuild capital buffers.

Potential asset-quality deterioration from the pandemic shock appears manageable, but there are risks as forbearance measures unwind amid heightened global macroeconomic uncertainty.

India's debt-to-GDP ratio benefits in the near term from a sharp acceleration in nominal GDP growth.

We forecast the debt-to-GDP ratio to drop to 83.0 per cent in FY23 from a peak of 87.6 per cent in FY21, but it remains high compared to the 56 per cent peer median. Beyond FY23, however, our expectations of only a modest narrowing of the fiscal deficit and rising sovereign borrowing costs will push the debt ratio up slightly to around 84.0 per cent by FY27, even under an assumption of nominal GDP growth of around 10.5 per cent.

On fiscal deficit, Fitch Ratings said, "We forecast India's general government fiscal deficit to remain broadly stable at 10.5 per cent of GDP (excluding divestment) in FY23, compared to 10.7 per cent in FY22.

In its budget, the central government prioritised capital expenditure over more substantial fiscal consolidation. We forecast that the fuel excise-duty cuts and increased subsidies (about 0.8 per cent of GDP) announced in May to offset higher commodity prices for consumers, will push the central government deficit to 6.8 per cent of GDP compared to the budget's 6.4 per cent target, despite robust revenue growth."

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