New Delhi, June 12: In what may serve to be a big boost to investor sentiment, Fitch ratings has upgraded India's outlook to stable from negative. The international ratings agency has affirmed India's credit rating at BBB-.
Fitch expects the country to meet its FY14 fiscal deficit target of 4.8 per cent. According to Fitch, inflation pressures have begun to show pronounced signs of easing. The recent weakness in rupee may limit scope for more rate cuts, added Fitch.
"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 FY14 budget, as well as some, albeit limited, progress in addressing some of the structural impediments to investment and economic growth," the agency said.
According to Fitch the government was successful in containing the upward pressure on the central government budget deficit in the face of a weaker-than-expected economy. "The central government fiscal deficit was 4.9 per cent of GDP in FY13 (financial year ended March 2013), compared with 5.7 per cent in FY12 and Fitch's forecast when it placed India's ratings on Negative Outlook in June 2012 of close to 6 per cent," the agency added.
The agency feels that the government has also begun to address structural factors that have weakened the investment climate and growth prospects, notably regulatory uncertainty, delays in government approvals of investment projects and supply bottlenecks, for example, in the power and mining sectors.
"The establishment of a Cabinet Committee on Investment should help to fast-track infrastructure-related projects and the government has made it easier for foreign-direct investment to access a range of industries," it added.
"Nonetheless, the investment climate could benefit from further reforms, such as the new land acquisition bill, some liberalisation of insurance and pension provision and public procurement, which are pending parliamentary approval. Addressing the structural issues in the power and mining sectors would further boost investor confidence," the agency substantiated.
The agency expects India Gross Domestic Product (GDP) to expand at 5.7 per cent in FY14 and 6.5 per cent in FY15. "India's economic recovery, however, is likely to remain slow until a healthier investment climate is created, which helps lift potential growth again," it said.
On the banking sector, Fitch said that the profitability and capital position of the banking sector will remain under pressure as asset quality continues to gradually deteriorate. "Nonetheless, Fitch does not view the banking sector as a material risk to macro-financial stability nor to public finances in terms of the crystallisation of large contingent liabilities," it said.
Despite deterioration in the current account deficit, in part 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," the agency said.
Fitch went on to say that India's investment-grade ratings 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. While Fitch has revised down its assumption regarding potential growth to 6 per cent-7 per cent from 8 per cent-9 per cent, it remains one of the most dynamic and diversified economies in the world.
However, Fitch feels that India's sovereign ratings remain constrained by persistent structural budget deficits and high public debt as well as by the challenges associated with large segments of the population engaged in low-valued added activities.