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Fitch Ratings today scaled up the outlook on India’s sovereign ratings from negative to stable, owing to the government’s efforts to contain the fiscal deficit and address structural issues to perk up investment and growth. Fitch’s move may boost investor confidence in India, something evident from the fact that following the rating agency’s announcement, the rupee ended the day with a 61 paise gain.
The rating agency, however, affirmed its long-term foreign- and local-currency issuer default ratings (IDRs) at BBB-. It also affirmed the country ceiling at BBB- and the short-term foreign currency IDR at ‘F3’. These ratings point to the lowest investment grade.
Today’s action came less than a month after Standard & Poor’s warned against downgrading India’s rating to junk in a year, if reforms were not accelerated. Another US rating agency, Moody’s Investors Service, already has a stable outlook on India’s ratings. All these agencies’ ratings on India stand at a notch above junk grade, or the lowest investment grade. Though India has been urging the agencies to upgrade its ratings, Fitch today upgraded only the outlook.
A few days ago, the finance ministry had alleged Fitch Ratings had shown confidential information on India to the Securities & Exchange Commission. Fitch, however, denied the allegation.
Today, the agency said the stable outlook was a result of the government’s action to boost economic activities. “It reflects the measures taken by the government to contain the budget deficit, including commitments made in the FY14 Budget, as well as some, albeit limited, progress in addressing structural impediments to investment and economic growth,” the rating agency said in a statement.
It also acknowledged the government’s commitment to contain the fiscal deficit in 2012-13.
Last financial year, the Centre managed to cut its fiscal deficit to 4.9 per cent of gross domestic product (GDP), compared with 5.7 per cent in 2011-12. In 2012-13, the fiscal deficit was lower than both the revised estimate (5.2 per cent), as well as the Budget estimate (5.1 per cent).
Fitch said the recent pressure on the rupee could delay a rate cut by the Reserve Bank of India (RBI). “The recent weakness of the exchange rate may, however, complicate policy management and limit the scope for further cuts in RBI’s policy rates,” it added.
However, inflationary pressures had started showing more pronounced signs of easing, in response to weaker economic conditions and the tightening of monetary conditions by RBI in 2011-12, it said.
On gold imports widening the current account deficit, Fitch said despite the deterioration, it considered “India’s overall external position to be a relative rating strength”. It added RBI’s international reserves could provide a cushion to absorb adverse external shocks. As of May-end, these reserves stood at $288 billion.
The rating agency said signs of a recovery would continue to elude until a healthy investment climate is recorded. Fitch expects gross domestic product growth to rise 5.7 per cent this financial year and 6.5 per cent in 2014-15. For this financial year, the government has estimated 6.4 per cent growth.
For the constrained ratings, the agency blamed persistent structural budget deficits and high public debt, along with challenges associated with segments of the population engaged in low-valued added activities. It said the government had been able to address structural bottlenecks; tackling structural issues in the power and mining sectors would further boost investor confidence. Lat year, the government had formed the Cabinet Committee on Investments to fast-track clearances for mega infrastructure projects. It had also raised the cap for foreign direct investment (FDI) in various sectors and opened the multi-brand retail segment to 51 per cent FDI.
