Fitch keeps India's rating at 'BBB-', outlook 'stable'

Sees FY16 growth at 7.5%, FY17 at 8%

Fitch keeps India's rating at 'BBB-', outlook 'stable'
India’s drumbeat of economic reforms at home and abroad has fallen on deaf ears of international rating agency Fitch, which on Monday, kept the country’s sovereign rating unchanged at the current lowest investment grade BBB-.

“Fitch’s affirmation of India’s sovereign ratings and stable outlook balances a strong medium-term GDP growth outlook and favourable external finances, including a strong foreign reserves buffer, with a high government debt burden and weak structural features, including a difficult, but improving, business environment,” it said in a statement.

The rating agency said that what could also impact negatively is “loose macroeconomic policy settings” that cause a return of persistently high inflation levels, and a widening current account deficit, would increase the risk of external funding stress.

Holding that India’s positive GDP growth outlook stands out globally, the rating agency estimated the country’s GDP growth to grow 7.5 per cent this fiscal, and eight per cent in 2016-17, supported by the government’s beefed-up capex spending and gradual implementation of a broad-based structural reform agenda.

“The Reserve Bank of India’s policy rate cuts of 125 bps (basis points) in total in 2015, are also likely to contribute to higher GDP growth, even though monetary transmission is impaired by relatively weak banking sector balance sheets,” Fitch said. A decline in government debt burden, improved business environment through reforms, higher growth, investments, and a controlled inflation would lead to positive rating action.

However, a deviation from the fiscal consolidation path, deterioration in the banking sector’s asset quality, higher inflation and widening of current account deficit could lead to a negative rating action, it warned.

“Translation of structural reforms into improved indicators and higher real GDP growth depends on actual implementation. India’s sovereign ratings continue to be constrained by limited improvement in its fiscal position,” Fitch said.

The Seventh Pay Commission’s recommendation of a 23.6 per cent increase in remuneration for central government employees, raises doubt about the feasibility of the medium-term consolidation path without any new revenue-generating measures, it said.

It said India is less vulnerable than many peers to a potential  slowdown in China as bilateral trade between the two countries is limited (3.6 per cent of India’s exports in 2014-15).

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