Fitch Ratings has affirmed the India’s foreign and local currency issuer default ratings (IDRs) at ‘BBB-‘ (BBB minus) with a Stable Outlook. Fitch has also affirmed the Country Ceiling at ‘BBB-‘ (BBB minus) and the Short-term Foreign Currency Rating at ‘F3’.
Fitch has commented that the net capital inflows – chiefly foreign direct and portfolio equity investment – have been more than sufficient to fund these deficits, and international reserves have continued to climb to more than $260billion undiminished by the turmoil in global credit markets.
Although sudden reversals in portfolio equity inflows cannot be ruled out, Fitch judges this risk to be manageable in the context of India’s comfortable reserve position.
Moreover, with increments in reserves outstripping increases in external public debt, Fitch now ranks India as one of the strongest public net external creditors in the ‘BBB’ range, alongside Russia and Kazakhstan.
According to Fitch comparable increases in domestic savings and investment have served to contain the current account deficit to 1%-2% of GDP, notwithstanding a doubling in the value of oil imports since FY04-FY05.
“Fitch upgraded India to investment grade in August 2006. One year on, the growth story remains firmly intact, reinforced by strong net capital inflows and further advances in India’s external solvency and liquidity indicators.
Fiscal consolidation, too, has continued to move ahead, narrowing the gulf between India and many of its rating peers,” says Paul Rawkins, senior director in Fitch’s Sovereigns team.
Tighter monetary policy has succeeded in reducing inflation to about 3% and curbing the rate of domestic credit expansion, but externally driven pressures on liquidity and rapidly escalating asset prices continue to pose challenges.
Fitch argues that India remains a rank outsider on most fiscal measures underlining the distance it needs to make up compared with its peers. Strong growth will be critical, but so too will be faster reform.
In the short term, the electoral timetable points to reform stalemate: a general election must be held by May 2009 (and may be earlier).
Fiscal consolidation will need to remain at the forefront, however, if the government of the day is to make progress on the provision of basic infrastructure, banking sector reform and further opening up of the balance of payments capital account.