In a development that may bring some cheer and help the government in stemming the rupee slide, Fitch Ratings, on Wednesday, revised India’s sovereign credit outlook to ‘stable’ from ‘negative’ and affirmed the ‘BBB-’ rating assigned earlier.

Taking note of the government earnest efforts to contain the fiscal deficit, Fitch, in a statement, said: “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 2013-14 budget, as well as some, albeit limited, progress in addressing some of the structural impediments to investment and economic growth.”

In its statement, Fitch noted it expected the Indian economy to recover after real GDP grew just 5 per cent in 2012-13 as compared to 6.2 per cent in the previous fiscal. “India’s economic recovery, however, is likely to remain slow until a healthier investment climate is created, which helps lift potential growth again. As a result, Fitch is forecasting only a modest recovery with real GDP expected to expand 5.7 per cent and 6.5 per cent in 2013-14 and 2014-15, respectively,” it said.

Significantly, it was Fitch, along with Standard and Poor’s (S&P), that had earlier threatened to downgrade India’s rating to ‘junk’ grade in case the authorities failed to contain the deficits and take steps to spur growth. In that context, the revision in outlook could not have come at a better time as the authorities are now seriously engaged in devising ways and means of stemming the depreciation of the rupee against the dollar.

Inherent strength

In this regard, what may turn out to be a huge positive is the fact that Fitch has pointed to India’s inherent economic strength despite deterioration in the current account deficit (CAD), which in part has been due to an increase in gold imports. “Fitch considers India’s overall external position to be a relative rating strength. Foreign debt is moderate and RBI’s international reserves, which stood at $288 billion at the end of May, provide a cushion to absorb adverse external shocks,” it said.

India’s investment-grade ratings, it said, are also underpinned by high domestic savings rates that limit the reliance on foreign savings for private investment and fiscal funding, as well as by a relative long maturity of government debt issued in its own currency. Pointing to the other factors for outlook revision affirmation of investment-grade ratings, Fitch said the Indian authorities were successful in containing the upward pressure on the Central government budget deficit in the face of a weaker-than-expected economy. It expected the government to broadly meet its 2013-14 budget deficit target of 4.8 per cent of GDP (including privatisation receipts) and to gradually reduce the high level of public debt over the medium-term.

It also noted that the government has begun to address structural factors that have weakened the investment climate and growth prospects, notably regulatory uncertainty, delays in approvals of investment projects and supply bottlenecks in the power and mining sectors.

Inflation pressures have begun to show more pronounced signs of easing in response to weaker economic conditions and the tightening of monetary conditions by the Reserve Bank of India (RBI) during the course of 2011-12. The recent weakness of the exchange rate may, however, complicate policy management and limit the scope for further cuts in RBI policy rates, it said.

The revision reflects the measures taken by the government to contain budget deficit

Keywords: FitchIndian economyFDI