Fitch affirms India's rating at 'BBB-'; outlook stable
Credit rating agency Fitch on Thursday affirmed India's 'Long-Term Foreign-Currency Issuer Default Rating' (IDR) at 'BBB-' with a stable outlook.
"India's ratings balance a strong medium-term growth outlook and favourable external balances relative to peers with weak fiscal finances, a fragile financial sector and some lagging structural factors," Fitch said in a statement.
"India's strong growth outlook continues to stand out among peers. Fitch expects real GDP growth of 7.8 per cent for the fiscal year ending 31 March 2019 (FY19), up from 6.7 per cent in FY18, although this forecast is subject to downside risks from tightening financial conditions, weak financial-sector balance sheets and high international oil prices."
According to Fitch, growth is expected to decelerate to a still-strong 7.3 per cent in both FY20 and FY21 "for the same reasons".
"Average projected growth for the three years through to FY21 would be the highest among 'BBB' peers and the third-highest among all sovereigns rated by Fitch. India's GDP growth has the potential to remain strong for a substantial period, as continued structural reform implementation may enhance productivity," the credit rating agency said.
As per the statement, risks to the macroeconomic outlook are "significant, and include a drop in credit growth, resulting from further problems in the banking or shadow-banking sector".
"Recent defaults by a large non-bank financial institution, Infrastructure Leasing & Financial Services, which is partly owned by state-owned Life Insurance Cooperation of India and some public-sector banks, highlight risks in a sector that in recent years supplied around a third of total credit growth," Fitch said.
"As with other emerging economies with current-account deficits, India has been vulnerable to shifts in market sentiment from global trade tensions and U.S. monetary tightening. A widening current-account deficit, resulting from a higher oil import bill and accelerating economic activity, appears to have aggravated the market sell-off in India."
The credit rating agency added that depreciation of the rupee, by 11 per cent against the US dollar since the beginning of 2018 has been the steepest among major currencies in Asia, despite intervention that resulted in a $33 billion loss in foreign-exchange reserves between April and October.
"The currency could remain under pressure as the positive differential between the U.S. and Indian policy rates continues to narrow. The large portfolio inflows that India enjoyed in the previous few years are unlikely to return in the current external environment," the statement added.
"Fitch expects India's reserve buffers to cover 6.4 months of current external payments at the end of FY19, down from 7.9 months in FY18, but still stronger than the 'BBB' median of 4.9 months. India is also more resilient to external shocks than many peers given the comparatively closed nature of the economy."