Fitch cuts India outlook to ‘negative’; keeps rating unchanged at lowest investment grade

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Updated: Jun 18, 2020 10:23 AM

Rating agency Fitch has cut India’s sovereign credit rating outlook to ‘negative’, while keeping the rating unchanged at the lowest investment grade -- ‘BBB-’.

While the financial profile of the group will benefit from lower dividends to minority shareholders after a delisting, additional debt and the related interest burden for the privatisation may negate this benefit.Fitch predicts that India’s GDP growth will rebound to 9.5% in financial year 2022 with the rebound mainly led by a low-base effect.

Rating agency Fitch has cut India’s sovereign credit rating outlook to ‘negative’, while keeping the rating unchanged at the lowest investment grade — ‘BBB-’. The move comes weeks after rating agency S&P also kept India’s sovereign credit rating at ‘BBB-‘ with a stable outlook, while another rating agency Moody’s cut the sovereign credit rating of India to its lowest investment grade ‘Baa3’. “The coronavirus pandemic has significantly weakened India’s growth outlook for this year and exposed the challenges associated with a high public-debt burden.” Fitch said in a statement. With the latest rating action by Fitch, India is at the lowest investment grade on the rating scale of all the three major agencies.

The rating agency expects economic activity to contract by 5% in the fiscal year ending March 2021, owing to the strict lockdown measures imposed since 25 March 2020. Fitch, however, predicts India’s GDP growth will rebound to 9.5% in financial year 2022, primarily led by a low-base effect. India’s rating forecast, Fitch said, is subject to considerable risk as the number of coronavirus cases continue to rise in the country while the lockdown is eased. “It remains to be seen whether India can return to sustained growth rates of 6% to 7% as we previously estimated, depending on the lasting impact of the pandemic, particularly in the financial sector,” Fitch said. 

Government debt, which presently stands at 70% of GDP in financial year 2020, is expected to surge to 84.5% of the GDP by next year as fiscal metrics deteriorate. India’s debt is significantly higher than other BBB category nations where media debt stands at 42% of GDP. The problems in the financial sector were highlighted by Fitch in a similar fashion to S&P Global and Moody’s. “India’s medium-term GDP growth outlook may be negatively affected by renewed asset-quality challenges in banks and liquidity issues in non-banking financial companies (NBFC),” it said. Lapses in governance have had an adverse effect on banks that were already dealing with weak business and consumer confidence before the crisis. Fitch estimates the banking sector’s non-performing loan (NPL) ratio likely improved to 9.0% in FY20 from 11.6% two year earlier, due to government capital injections.

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