Fitch Says India Sovereign Ratings May Be Reviewed

Mumbai, Nov 14: | Updated: Nov 15 2003, 05:30am hrs
The restructuring of the Indian corporate sector which has set the stage for flow of private sector investments, reforms in the power sector, a strong banking sector, and comfortable forex reserve position is expected to positively impact the countrys sovereign ratings, opined Fitch Ratings head of Asia Sovereign Ratings Brian Coulton, on Friday. India currently has a BB foreign currency rating from Fitch with a stable outlook.

Fitch sovereign rating team will be visiting India this month and will use this opportunity to interact with investors. Mr Coulton while making a presentation on Indias Sovereign Ratings in an Asian Context said that India will also be better placed to absorb interest rates shocks which might come on account of interest rates moving up in the future.

Mr Coulton, however, cautioned that positive indicators might necessarily not translate in to better ratings as the picture may change when all the aspects are plotted to decide the ratings.

Another factor which might be a drag on the ratings would be the war risk on the north-western borders. He said that the recent improvement in relations with Pakistan does not entirely eliminate this risk and is likely to impact the rating adversely to some extent. Currently, one of the weakness that Fitch mentions in its sovereign ratings for India are the weak state-run banks and loss-making public enterprises. Mr Coulton said that Fitch views the state-run banking system negatively, and added that the strong performance by banks in terms of cutting down non-performing assets (NPA) and higher capital adequacy ratio is an encouraging signal and might eventually lead to banking sector disappearing as a weakness.

While drawing a comparison with the Chinese banking sector, Mr Coulton said that NPAs in that country are at around 30 per cent while that of India is at 10 per cent; capital adequacy is at 4.5 per cent as against 12 per cent in India. He said that the problems of the Chinese banking sector may however be a result of the sheer size of the sector.

There is a clear need to spend more on infrastructure said Mr Coulton, said. He observed that the governments inability to do so is the result of a huge fiscal deficit as a large chunk of the revenue is used for debt servicing while government expenditure on salaries and wages eats in to a large part of government revenues.

According to Mr Coulton, the current fiscal system is not sustainable. He qualified thought that the fiscal adjustments that the government needs to take is achievable with the economy showing signs of revival.