Fitch Ratings today raised India’s local currency outlook to ‘stable’ from ‘negative’, forecasting a fall in the government debt ratio on the back of strong economic growth and the one-off positive impact of telecom spectrum auctions.
The rating agency reaffirmed the country’s local and foreign currency rating at ‘BBB-’ and retained a stable outlook on foreign currency issuer default rating.
‘BBB’ is an investment-grade rating indicating expectations of default risk are currently low but adverse business or economic conditions are more likely to impair the capacity for repayment.
The rating agency’s action comes three months after S&P revised its outlook on India from negative to stable while reaffirming the country’s rating at ‘BBB-’.
In December last year, Moody’s upgraded its outlook on Indian government’s local currency bond rating (Ba2) to positive from stable while retaining a stable outlook on the country’s foreign currency bonds.
Fitch projects general government debt to fall to 80 per cent of gross domestic product (GDP) by March- end 2011 from 83 per cent at March- end 2010, reflecting the impact of strong GDP growth on the denominator and the one-off revenues from the 3G licence and broadband spectrum auctions.
The agency has raised India’s 2010-11 growth forecast to 8.5 per cent from 7 per cent on signs of strong growth momentum, including industrial production growth of 17.6 per cent in April 2010, year-on-year. The telecom licence auctions together netted the government Rs 1.06 lakh crore, representing about 1.6 per cent of projected 2010-11 GDP, as against the Rs 35,000 crore estimated originally.
The agency anticipates some pressure on the government to spend some of the revenue windfall and estimates an additional 0.3 per cent spending in 2010-11, still delivering a net 1.3 per cent fiscal saving.
“India’s credit profile continues to benefit from the largely local-currency profile of its debt (95 per cent of the stock), and from the sovereigns stable access to domestic-currency financing, mainly from the banking system,” the ratings agency said in a statement.
Despite the positive outlook action, the ratings agency observed that the country’s fiscal management remains weak.
“India’s public finances remain clearly weak and downward pressure on the ratings could resume if India veers too far-off the deficit reduction path as outlined by the 13th Finance Commission,” said Andrew Colquhoun, Director in Fitch’s Asia-Pacific Sovereigns Group.
Fitch anticipates the central government’s deficit to be at 5.7 per cent of GDP in 2010-11, just .01 per cent down from 2009-10, despite the 1.6 per cent of GDP reaped from the telecom auction.
Fitch said inflation remains “uncomfortably high”, with wholesale prices up 10.2 per cent in the year till May.
