Fitch Ratings raised India's credit rating outlook to 'stable' on Wednesday, signaling support to the government's structural reforms and efforts to trim the country's massive budget deficit.
The upgrade will be most welcome to Prime Minister Manmohan Singh's government at a time when the rupee has weakened significantly and economic growth slowed to a decade-low in the fiscal year ended March 31.
The agency upgraded India's outlook to 'stable' from 'negative.' The outlook was cut exactly a year ago when the economy was facing multiple threats and the currency was weakening sharply.
Today, the country's long-term foreign- and local-currency Issuer Default Ratings (IDRs) were affirmed at 'BBB-,' which is the lowest investment grade rating. Fitch upgraded India to 'BBB-' in 2006. The rupee rose following the announcement of the upgrade.
In May, Standard & Poor's maintained its negative outlook on India's 'BBB-' rating, indicating at least a one-in-three chance of a downgrade within the next twelve months. The agency has warned that it will downgrade India's rating if government reforms fail to lead economic recovery and improve fiscal as well as current account deficits.
"The revision of the Outlook to Stable reflects the measures taken by the government to contain the budget deficit, including the commitments made in the FY14 budget, as well as some, albeit limited, progress in addressing some of the structural impediments to investment and economic growth...The authorities were successful in containing the upward pressure on the central government budget deficit in the face of a weaker-than-expected economy," Fitch said in a statement.
The country's fiscal deficit for fiscal 2013 was 4.9 percent, below Fitch's June 2012 forecast of close to 6 percent. The agency expects the Congress party-led coalition government to broadly meet its fiscal 2014 budget deficit target of 4.8 percent of GDP and to gradually reduce public debt.
Since last September, the Singh government has unleashed a slew of economic reforms that included opening up the retail and aviation sectors to foreign investment. The government also started measures to reduce fuel subsidy and distribute the existing subsidies by way of direct cash transfer. The country faces parliamentary elections next year.
"The authorities have also begun to address structural factors that have weakened the investment climate and growth prospects, notably regulatory uncertainty, delays in government approvals of investment projects and supply bottlenecks, for example, in the power and mining sectors," Fitch said.
Yet, persistent structural budget deficits and high public debt, as well as the challenges associated with large segments of the population engaged in low value added activities constrain India's sovereign ratings, the agency added.
Official data released earlier today showed that India's industrial production growth slowed sharply in April due to weak demand. Meanwhile, consumer price inflation eased slightly in May. Fitch sees only a modest recovery in GDP growth this fiscal and next.
Fitch drew attention to 'more pronounced signs of easing' in inflationary pressures recently owing to weaker economic situation and policy tightening by the Reserve Bank of India. However, the recent weakness of the exchange rate may complicate policy management and limit the scope for further cuts in RBI policy rates, it warned.
The Indian rupee's fall to an all-time low of 58.9855 against the dollar on Tuesday, prompted the central bank to intervene in the currency market to contain the depreciation. The government plans to ease foreign direct investment rules as part of its efforts to strengthen the currency.
The country's banking sector is likely to remain under pressure due to asset quality concerns, Fitch said. However, the sector is unlikely to pose any material risk to financial system stability or public finances, it added.
The agency views India's overall external position to be a relative rating strength, despite deterioration in the current account deficit, in part due to an increase in gold imports.
It expressed optimism that moderate foreign debt and the central bank's international reserves would provide a cushion to absorb adverse external shocks.
Further, high domestic savings rates as well as a relative long maturity of government rupee-debt also extend support to India's investment-grade ratings, Fitch said.
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