India’s sovereign rating is reaffirmed by fitch Ratings, keeps outlook

Fitch Ratings on Friday reaffirmed India’s sovereign credit rating in the lowest investment grade (BBB-) with stable outlook, holding that India’s rating balances a still strong medium-term growth outlook compared with’BBB’ class peers and relative outside resilience.

Rating agency Moody’s Investors Service had revised India’s sovereign rating outlook to negative from stable while reiterating its credit rating of Baa2 which is the lowest investment grade score, last month. Earlier this month, Standard & Poor’s retained the score of India at the lowest investment grade with outlook.

“Our outlook on India’s GDP growth is still solid against that of peers, even though growth has decelerated significantly over the last few quarters, due mainly to domestic factors, particularly a squeeze in credit availability from non-banking financial companies (NBFC) and deterioration in business and consumer confidence,” Fitch said.

Fitch expects India’s growth to slow to 4.6percent in the financial year ending March 2020 from 6.8percent in FY19, which it claimed is still higher than the’BBB’ median of 2.8%. “We expect growth to slowly recover to 5.6percent in FY21 and 6.5% in FY22 with assistance from easing monetary and fiscal policy and structural measures that may also support growth over the medium term,” it added.

The rating agency said the affirmation of the sovereign rating incorporates its anticipation of moderate financial slippage relative to the central government’s deficit target of 3.3percent of GDP in FY20. “The government is facing a trade-off between stimulating the market and reducing the deficit in the medium term. Some fiscal slippage has occurred in recent years against government targets, even during periods of sustained stronger growth. The FY20 deficit target had already been exceeded by end-October because of a weak earnings intake, and a deceleration of nominal quarterly growth suggests additional revenue pressure for the remaining financial year,” it added.

The government has indicated its company tax rate cut may lower earnings by 0.7% of GDP in FY20 and that it hopes to fund spending by more aggressive asset divestments, including that of Air India and Bharat Petroleum Corporation Limited. “We believe there is a risk of more significant fiscal loosening in the event of continued weak GDP growth, by way of example, in the context of lingering problems in the NBFC sector,” Fitch said.

Fitch expects the Reserve Bank of India (RBI) to cut its policy rate by another 65bps in 2020, following a cumulative 135bp easing since February 2019. “The uptick in inflation to 5.5percent in November appears to signify a temporary spike in food inflation, while pressure on core inflation, which remained steady at 3.5%, seems restricted in the present environment. The RBI has assembled a solid monetary policy record since the inception of the Monetary Policy Committee in October 2016, with headline inflation remaining within the medium-term inflation target range of 4% +/- 2%,” it said.

The rating agency believes that the government will stay focused on reforms during the term of Prime Minister Narendra Modi. It also intends to consolidate the banks. The positive impact of these reforms on growth is very likely to materialise in the medium term, instead of the near term, and will be based on the details and implementation,” Fitch said.