Fitch affirms India rating at ‘BBB-‘, outlook stable


Fitch Ratings on Tuesday affirmed India’s long-term foreign currency issuer default rating at ‘BBB-‘ with a stable outlook, saying India’s rating reflects the strength of a strong growth outlook compared to peers and still resilient external finances.

However, this is offset by India’s weak public finances, high deficits and debt vis-à-vis peers and lagging structural indicators, including the World Bank’s governance indicators and GDP per capita, it noted.

A “BBB” rating, classified as investment grade, indicates that default risk expectations are currently low and the ability to pay financial commitments is considered adequate, but adverse business or economic conditions are likely to impair this ability.

India’s still resilient external finances have helped India weather major external shocks over the past year, he said.

According to Fitch, sustained recovery in consumption and investment supports our GDP growth forecast of 7.0% in the fiscal year ending March 2023 (FY23). India is somewhat insulated from the gloomy global outlook in 2023 due to weak reliance on external demand. “However, we expect declining exports, increased uncertainty and higher interest rates to slow growth to 6.2% in FY24 (‘BBB’ median: 2.0%). We also expect consumption growth to moderate as pent-up demand dissipates,” said Fitch.

India’s strong medium-term growth outlook is a key factor in the rating, Fitch said. A clear improvement in the balance sheets of companies and banks that were strained before the pandemic is likely to facilitate a continued acceleration of investment in the coming years.

“The government’s ongoing infrastructure push and reform agenda, along with efforts to attract greater FDI inflows, complement these opportunities. However, risks remain due to the dynamics of labor force participation, the delayed recovery of the rural sector and the uneven reform implementation record,” he said.

Risks in the financial sector continue to ease due to a strong and sustained economic recovery. “We expect asset quality pressures to hold well, even as regulatory resistance fades, supporting the performance of the sector. Credit growth has grown rapidly, and we expect these trends to continue due to increased credit demand and risk appetite, provided capitalization is well managed” , Fitch said.

The normalization of domestic liquidity conditions is partly alleviated by the large funding of the deposit, he said.

The general government deficit has retreated from a pandemic high of 13.5 percent of GDP (excluding divestment), but is expected to remain high relative to peers. “We expect the deficit to narrow slightly to 9.6 percent of GDP in FY23 (‘BBB’ median: 4.1%) from 9.8 percent in FY22. For the central government, we expect a modest fiscal slippage in FY23, with a deficit of 6.6 percent of GDP (disinvestment including) compared to the budget target of 6.4%, due to higher subsidies for food and fertilizers, but the growth in income and changes in expenditure will bear the fiscal toll of the measures, while allowing capital expenditure to remain a priority,” he said.

“Our FY23 government deficit forecast is lower than the 10.5 percent of GDP we expected in our June 2022 review, largely because state deficits have narrowed much faster than we anticipated,” he said. Strong revenues and limited spending pushed the temporary aggregate deficit below the pre-pandemic norm of 3 percent of GDP in 2022 from 4.1 percent in 21. “We expect it to remain around these levels in FY23,” Fitch said.

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