Global rating agency Fitch Ratings did not upgrade India’s sovereign rating, reaffirming its lowest investment grade rating at BBB-, with a stable outlook.
It blamed weak fiscal finances and some lagging structural factors, including governance standards and a still difficult, but improving, the business environment for its rating action, although it noted India’s strong medium-term growth outlook and favorable external balance.
Last year, while Moody’s Investors Service raised India’s sovereign rating from the lowest investment grade of Baa3 to Baa2, and changed the outlook to stable from positive, Standard and Poor’s kept its India rating unchanged at the lowest investment grade of BBB-, with a stable outlook.
The rating agency said the central government’s aim to gradually reduce its own fiscal deficit from 3.5% in FY18 to 3.0% of GDP by March 2021 is “well beyond its current electoral term”. “The government has reasserted its longer-term aim of gradual fiscal consolidation with an amendment of the FRBM Act to set a ceiling for central government debt at 40% of GDP and general government debt at 60% of GDP, to be reached by March 2025. This is a positive step towards a more prudent fiscal framework if eventually adhered to,”
Fitch said India can expect a rating upgrade if it reduces general government debt over the medium term to a level closer to that of rated peers at 41% of GDP and maintains higher sustained investment and growth rates without the creation of macro imbalances, such as from successful implementation of structural reforms.
On the other hand, if public debt burden increases, which may be caused by stalling fiscal consolidation or greater-than-expected deterioration in the balance sheets of public sector banks as well as loose macroeconomic policy settings that cause a return of persistently high inflation and widening current account deficits, it could trigger a rating downgrade.
Fitch projected the economy to revive to grow at 7.3% in 2018-19 and 7.5% in 2019-20 from 6.6% a year ago as a “temporary drag will fade from the withdrawal of large-denomination bank notes in November 2016 and the introduction of a Goods and Services Tax (GST) in July 2017”.
Fitch praised the Reserve Bank of India (RBI) for building a solid monetary policy record, as consumer price inflation has been well within the target range of 4% +/- 2% since the inception of the Monetary Policy Committee in October 2016. However, it expects RBI to start raising its policy rates next year from 6% currently as growth gains further traction.