Fitch Ratings has affirmed the country’s long-term foreign-currency issuer default rating (IDR) at 'BBB-' with a stable outlook.
``India's rating balances a strong medium-term growth outlook and favourable external balances with weak fiscal finances and some lagging structural factors, including governance standards and a still-difficult, but improving, business environment,’’ Fitch said.
A favourable economic growth outlook continued to support India's credit profile, Fitch said. This was despite the fact that the real GDP (gross domestic product) growth fell to 6.6% in the fiscal year ended 31 March 2018 (FY18) according to official preliminary estimates, from 7.1% in FY17, it added.
The rating agency said that India’s growth could rebound to 7.3% in FY19 and 7.5% in FY20. And, it expected the temporary drag - caused by the withdrawal of large-denomination bank notes in November 2016 and the introduction of a Goods and Services Tax (GST) in July 2017 - to fade away. ``The GST is an important reform, however, and is likely to support growth in the medium term once teething issues dissipate,’’ Fitch said.
Stating that India's five-year average real GDP growth of 7.1% was the highest in the APAC region and among 'BBB' range peers, the rating agency said that the growth had the potential to remain high for a substantial period of time.
``The Reserve Bank of India (RBI) is 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.’’ it said. Fitch expected inflation to average close to 4.9% in FY19, still almost double the 'BBB' range median of 2.5% for 2018.
``We expect the RBI to start raising its policy repo rate next year from 6% currently as growth gains further traction. Monetary tightening could be brought forward if recent government policies push up inflation expectations, including the decision to increase minimum support prices for agricultural goods to 1.5 times the cost of production and increased customs duties on certain products, including electronics, textiles and auto parts,’’ the rating agency said.
India's relatively strong external buffers and the comparatively closed nature of its economy made the country less vulnerable to external shocks than many of its peers, it said.
Pointing out that the net FDI (foreign direct investment) inflows fell to $23.7 billion in the first three quarters of FY18 from $30.6 billion a year earlier, Fitch said that these were insufficient to cover a widening current-account deficit. ``We expect the basic balance to widen to -1.3% of GDP in FY20 from -0.5% of GDP in FY18 ('BBB' peer median +1.2% of GDP),’’ it added.
The government had continued to gradually open the economy to foreign investors, including allowing 100% FDI in the single-brand retail through the automatic route since January 2018. Such measures, Fitch said, could facilitate a recovery in FDI, particularly if combined with further investment climate reforms.
