Fitch revises India outlook to stable on recovery, growth prospects

Fitch Ratings has revised its outlook on India's long-term foreign-currency issuer default rating (IDR) to stable, from negative. The global ratings agency has affirmed the IDR for the country at ‘BBB-‘.

In the rationale behind the outlook revision, Fitch says the ratings action is based on the view that India's rapid economic recovery and easing financial sector weaknesses have mitigated downside risks to medium-term growth, despite near-term headwinds from the global commodity price shock. The agency expects this robust growth in comparison to peers will support credit metrics.

“High nominal GDP growth has facilitated a near-term reduction in the debt-to-GDP ratio, but public finances remain a credit weakness with the debt ratio broadly stabilising, based on our expectation of persistent large deficits. The rating also balances India's external resilience from solid foreign-exchange reserve buffers against some lagging structural indicators,” Fitch says.

The change in ratings comes shortly after India announced GDP growth of 8.7% for the fiscal year ended March 2022. Fitch foresees economic growth at the rate of 7.8% in the current fiscal, “compared with the 3.4% 'BBB' median”. However, Fitch had to revise its GDP projection for India downward from 8.5% in March on account of inflationary prices hindering growth momentum.

Fitch sees India's strong medium-term growth outlook relative to peers as a key supporting factor for the rating that will sustain a gradual improvement in credit metrics. “We forecast growth of around 7% between FY24 and FY27, underpinned by the government's infrastructure push, reform agenda and easing pressures in the financial sector,” the agency says.

However, the uneven nature of the economic recovery and implementation risks for infrastructure spending and reforms can adversely affect this forecast, it further warns.

Conditions in the financial sector have also improved in recent years after the pandemic-led disruptions, which should facilitate better credit allocation and investment in the medium term, Fitch notes. “Banks’ capital sufficiency will be important in determining their ability to provide more credit, even as regulatory forbearance has given them time to rebuild capital buffers. Potential asset-quality deterioration from the pandemic shock appears manageable, but there are risks as forbearance measures unwind amid heightened global macroeconomic uncertainty.”

Predicting rise in fiscal pressures on account of growing commodity prices, Fitch projected that India's fiscal deficit will remain broadly stable at 10.5% of GDP in FY23, excluding divestment, compared to 10.7% in FY22. It expects fiscal deficit to narrow at a modest pace over the next several years, reaching 8.9% of GDP by FY25.

“We forecast that the fuel excise-duty cuts and increased subsidies (about 0.8% of GDP) announced in May to offset higher commodity prices for consumers, will push the central government deficit to 6.8% of GDP compared to the budget’s 6.4% target, despite robust revenue growth,” it says.

On inflation, Fitch says inflation levels are likely to remain elevated in FY23 at 6.9% due to the sharp rise in global commodity prices and underlying demand pressures. “The Reserve Bank of India (RBI) lifted its policy repo rate by 90 bps to 4.90% in just over a month, signalling its growing concerns that inflation could exceed its 2-6% target band for a sustained period. We forecast the RBI to continue to withdraw liquidity and raise rates, with the repo rate reaching 6.15% by FY24,” the agency states.