Fitch trims India outlook to ‘negative’, reaffirms rating

By: |
Published: June 19, 2020 3:40 AM

However, it also suggested that the implementation of a credible strategy to reduce general government debt and higher sustained investment and growth rates could trigger positive rating action.

In a statement, Fitch said: “The coronavirus pandemic has significantly weakened India's growth outlook for this year and exposed the challenges associated with a high public-debt burden.”In a statement, Fitch said: “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 Ratings on Thursday retained its sovereign rating for India at the lowest investment grade of BBB-, but trimmed its outlook to ‘negative’ from ‘stable’, citing a sharp Covid-induced deterioration of the country’s growth and fiscal metrics.

With this, Fitch joins its peers — S&P and Moody’s — in assigning the same rating to India, although S&P’s “stable” outlook is still a notch higher than assigned by the other two. Recently, while Moody’s had downgraded its India rating by a notch, S&P reaffirmed both its rating and outlook.

In a statement, Fitch said: “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 expects India’s debt levels to climb to 84.5% of the GDP in FY21, against 71% in the last fiscal. It has also predicted the real GDP to contract by 5% in FY21 due to the strict lockdown measures, before rebounding by 9.5% in FY22, mainly on a favourable base.

But it cautioned that its further negative ratings action could be triggered by a structurally weaker growth outlook (for instance due to continued financial-sector weakness or the absence of reform implementation) and failure in fiscal consolidation after the pandemic.

However, it also suggested that the implementation of a credible strategy to reduce general government debt and higher sustained investment and growth rates could trigger positive rating action.

The global agency flagged the country’s inconsistent record on fiscal consolidation as a risk to the medium-term outlook. It also expressed concerns over balance sheet stresses in the banking and shadow banking sectors, which had been staring at a massive spike in bad loans.

However, the overwhelming domestic holdings of India’s public debt and the central bank’s accumulation of record forex reserves of $502 billion (which suggests higher current account payment coverage than the BBB- median) somewhat eased the rating agency’s apprehensions. The country’s credible inflation-targeting framework and fresh commitment to structural reforms and ease of doing business were a plus, too. Fitch predicts another 25-basis point rate cut by the RBI in FY21.

Nevertheless, the agency cautioned that its forecasts are “subject to considerable risks due to the continued acceleration in the number of new Covid-19 cases as the lockdown is eased gradually”. “It remains to be seen whether India can return to sustained growth rates of 6-7% as we previously estimated, depending on the lasting impact of the pandemic, particularly in the financial sector,” it said.

It expected an official announcement of further fiscal spending of up to 1 percentage point of GDP in the next few months, which was indicated by a recent announcement of additional borrowing for FY21 of 2% of GDP, “although we do not expect a steep rise in spending”.

Most elements of an announced package (Rs 21-lakh-crore package) totalling 10% of the GDP are non-fiscal in nature, with fiscal implication of just 1% of the GDP.

India’s debt levels are substantially higher than the median of 42.2% of GDP for the ‘BBB’ category in FY20 and 52.6% for 2020, Fitch said.

Do you know What is Cash Reserve Ratio (CRR), Finance Bill, Fiscal Policy in India, Expenditure Budget, Customs Duty? FE Knowledge Desk explains each of these and more in detail at Financial Express Explained. Also get Live BSE/NSE Stock Prices, latest NAV of Mutual Funds, Best equity funds, Top Gainers, Top Losers on Financial Express. Don’t forget to try our free Income Tax Calculator tool.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Indo-US trade: Piyush Goyal to meet his US counterpart Wilbur Ross next week to revive bilateral talks
2Shrimp exports to US decline by 58% in May
3SBI chairman Rajnish Kumar’s big remark about India’s economic recovery – here’s what he said