Fitch affirms India's long-term FX rating at 'BBB-' with stable outlook

Fitch Ratings has affirmed a stable outlook, while retaining the lowest investment grade for India's Long-Term Foreign-Currency Issuer Default Rating (IDR) at BBB- (minus). Fitch ratings in its report released on Tuesday also forecast India’s GDP growth of 6.9 per cent in the fiscal year ending March 2024 (FY24), well above its previous 6.0 per cent forecast in its last review in May 2023. 

“India is poised to remain one of the fastest-growing countries globally in the next few years as the robust economic momentum is proving resilient,” the ratings agency said. 

The agency said that India's rating is underpinned by a robust medium-term GDP growth outlook and sound external finances, which remain intact as the country has effectively navigated a fraught external environment in the past few years.

“Weak public finances - illustrated by high deficits, debt and interest/revenue ratio compared with peers - continue to be the largest constraint for the rating.” 

Fitch Ratings also expects the government to achieve its fiscal deficit target of 5.9 per cent of GDP in FY24 from 6.4 per cent in FY23. It expects the spending to be managed to meet the target, even in an election year, even though the subsidy and income support spending has risen beyond budget expectations. 

While sustained reforms could support and boost growth prospects, Fitch Ratings said that risks may arise from an uneven implementation record. “Labour market weakness, partly reflected in low female participation, also poses a risk to the outlook,” it said.

The rating agency also expects the private investment to accelerate gradually, but consumption, it said, is likely to moderate further in the near term due to reduced household savings buffers.

It also forecast the general government debt would remain high, at 82.7 per cent of GDP at FYE24. “We believe limited rebuilding of fiscal buffers amid high GDP growth narrows fiscal headroom from a ratings perspective to respond to potential economic shocks.”

Fitch Ratings also said that its expects policy continuity in India, with gradual fiscal consolidation and economic reform momentum due to indications of re-election of Prime Minister Narendra Modi in the next general elections.