Ratings agency Fitch today kept India’s sovereign rating unchanged at ‘BBB-‘ — the lowest investment grade — citing a “weak fiscal position and difficult business environment”, but also kept the outlook ‘stable’, saying that it expects the situation to improve going further as the reforms spread wide.
“The sovereign ratings at BBB- balance a strong medium- term growth outlook and favourable external balances with a weak fiscal position and difficult business environment,” Fitch Ratings said in a note today. “However, the business environment is likely to gradually improve with the implementation and continued broadening of the structural reform agenda,” the note added.
Why it matters
The government has been pitching hard for a rating upgrade by Fitch and other agencies, saying the country’s strong economic fundamentals, political stability and a slew of reforms need to be better reflected in the rating assigned to it. However, India continues to be rated ‘BBB-‘ — just a notch above the junk grade and lowest among investment grade ratings — by most of the global credit rating agencies. Today’s rating action may be another disappointment for the government.
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Why Fitch won’t budge
Sovereign ratings, which essentially rate the safety of investments made into the country, act as benchmarks for prominent global funds, which define their investment mandates according to the ratings. Ratings agencies study various factors to determine the perceived safety of investments in various geographies, including any risks that may arise later. In this case, Fitch, while acknowledging the government’s reform programme, said that the real change hinges on the successful implementation. “The impact of the reform programme on investment and real GDP growth will depend on how it is implemented and the extent to which government continues its strong drive to improve the still-weak business environment,” the agency said.
What’s the silver lining
Fitch, in its statement, noted that the government has been consistently rolling out its ambitious reform agenda for almost three years and remains committed to continued reforms. It expects India’s real GDP growth to accelerate to 7.7% in fiscal years 2017 and 2018, from 7.1% in the previous fiscal 2016. Fitch expects structural reforms to increase growth, along with higher real disposable income supported by implementation of the seventh pay commission recommendations and an average monsoon. Fitch said the stable outlook reflects the assessment that upside and downside risks to the ratings are broadly balanced.