Fitch upgrades India’s outlook from negative to stable

Author: Nishu June 10, 2022

Fitch upgrades India's outlook from negative to stable

Fitch Ratings on Friday, June 10, 2022 revised India’s outlook from ‘negative’ to ‘stable’, citing downside risks to medium-term growth due to rapid economic recovery and mitigating vulnerabilities in the financial sector given.

However, the global rating firm has cut its GDP growth forecast for 2022-23 to 7.8% from 8.5% projected in March due to the impact of inflation on the pace of growth.

Despite near-term constraints from global commodity price shocks, Fitch said it expects strong growth for India relative to its similar-rated peers, but with the debt ratio in the country’s public finance broadly stable. , based on its expectations of ‘consistently’ remains a credit weakness. Big losses.

The firm reaffirmed India’s long-term foreign exchange issuer default rating at ‘BBB-‘, revising the outlook, noting that it ‘balances India’s external resilience from a solid foreign exchange reserve buffer against some backward structural indicators’ ‘. BBB ratings reflect low expectations of default risk with sufficient capacity to pay for financial commitments, although unfavorable business or economic conditions are more likely to reduce this ability.

While higher nominal GDP growth has facilitated a near-term reduction in India’s debt-to-GDP ratio, Fitch Ratings said this year with a cut in excise duty on fuel to offset the rise in consumer prices is expected to be higher this year. The subsidy will cost around 0.8% of GDP. , This will push the Centre’s fiscal deficit to 6.8% of GDP from the budget target of 6.4% for 2022-23, despite strong revenues, it is believed.

“We expect India’s general government fiscal deficit to remain stable at 10.5 per cent of GDP (excluding disinvestment) in 2022-23, compared to 10.7 per cent in 2021-22,” Fitch said in its Rating Action commentary. ”

In the medium term, Fitch Ratings expects India’s growth to be around 7% between 2023-24 and 2026-27, emphasizing the government’s infrastructure push, reform agenda and easing pressure in the financial sector. , emphasizing that this strong growth outlook is a key driver. For its decision as it will maintain ‘gradual’ growth in credit metrics.

“Nevertheless, given the uneven nature of the economic recovery and the infrastructure spending and implementation risks of the reforms, there are challenges to this forecast,” it warned.

While the Reserve Bank of India (RBI) now expects inflation to average 6.7% by 2022-23, Fitch estimated it could exceed 6.9%, compared to the average rate of 4.9% for BBB-rated countries , which refers to ‘rapid growth’. Global commodity prices and underlying demand pressures’.

The rating firm expects the RBI, which has raised key rates by 90 basis points since May, to infuse liquidity and continue to hike rates, taking the repo rate to 6.15% by 2023-24.

Despite India’s high public debt, its ability to finance the deficit domestically is a strength for the country over its peers, Fitch said, pointing to only 2% of government securities and foreign currency debt to non-residents. While only 5% of India’s total debt, as opposed to the average rate of 33% for BBB-rated countries.

,However, continued large fiscal financing needs are likely to contribute to congestion from private sector debt and higher borrowing costs,” warned Fitch, noting that India’s fiscal consolidation target for 2025-26 may be difficult to meet. could.

“In its February budget, the central government retained its GDP FY26 deficit target of 4.5% but gave little clarity on measures to achieve it. In our view, achieving this target may prove to be challenging, especially as the revenue/GDP has already returned to pre-pandemic levels,” the firm said.

“We expect the general government fiscal deficit to shrink at a modest pace over the next several years, reaching 8.9% of GDP by 2024-25,” it underlined.

10 June, 2022, 12:50 pm

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