Fitch Ratings joins S&P and Moody’s in trimming India outlook to `negative’


Fitch Ratings retained its sovereign rating for India at the lowest investment grade of BBB negative, and trimmed its outlook to ‘negative’ from ‘stable’, citing a sharp Covid-induced deterioration of the country’s growth and fiscal metrics.

In a statement, Fitch said: “The coronavirus pandemic has significantly weakened India’s growth outlook for this year and exposed the challenges associated with a high public-debt burden.”

With this, Fitch joins its peers — S&P and Moody’s — in assigning the same rating to India, although S&P’s “stable” outlook is still a notch higher than assigned by the other two. Recently, while Moody’s had downgraded its India rating by a notch, S&P reaffirmed both its rating and outlook.

Fitch expects India’s debt levels to climb to 84.5% of the GDP in FY21, against 71% in the last fiscal. It has also predicted the real GDP to contract by 5% in FY21 due to the strict lockdown measures, before rebounding by 9.5% in FY22, mainly on a favourable base.

But it cautioned that its further negative ratings action could be triggered by a structurally weaker growth outlook and failure in fiscal consolidation after the pandemic.

However, it also suggested that the implementation of a credible strategy to reduce general government debt and higher sustained investment and growth rates could trigger positive rating action.

The global agency flagged the country’s inconsistent record on fiscal consolidation as a risk to the medium-term outlook. It also expressed concerns over balance sheet stresses in the banking and shadow banking sectors, which had been staring at a massive spike in bad loans.

However, the overwhelming domestic holdings of India’s public debt and the central bank’s accumulation of record forex reserves of $502 billion somewhat eased the rating agency’s apprehensions. The country’s credible inflation-targeting framework and fresh commitment to structural reforms and ease of doing business were a plus, too.

Fitch predicts another 25-basis point rate cut by the RBI in FY21. “It remains to be seen whether India can return to sustained growth rates of 6-7% as we previously estimated, depending on the lasting impact of the pandemic, particularly in the financial sector,” Fitch said.

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