Fitch refuses to do Moody’s, retains India’s view

Fitch refuses to do Moody’s, retains India’s view

Fitch Ratings has maintained India’s rating at the lowest investment grade and has a negative outlook on the central and state governments due to high debt and limited financial headroom. This move on Outlook is in contrast to Moody’s Investors Service, which recently upgraded Outlook from negative to stable.

With this, Moody's and Standard & Poor's have a stable outlook on their ratings on India, while Fitch still has a negative outlook.  All the three rating agencies have given the lowest investment grade to India.<span style="display: block;margin-bottom:13px;margin-top:13px;"/> 

Fitch’s negative outlook on ratings reflects uncertainty around the medium-term debt trajectory, especially given India’s limited fiscal headroom relative to ratings peers, it said.

It said the medium-term debt trajectory remains core to its rating assessment, as higher debt levels impede the government's ability to respond to shocks and could lead to funding congestion for the private sector.

General government debt grew to 89.6 percent of GDP during FY2011, the highest among emerging market peers.

“We anticipate the ratio to drop slightly to 89 percent, yet above the 60.3 percent average among similarly rated economies in 2021. 

Under our medium-term baseline forecasts, the debt ratio should fall to 86.9 per cent by FY26, assuming nominal growth of 10.5 per cent and a gradual consolidation of the general government primary deficit to 2.5 per cent of GDP,” it said. .

Risks to this forecast include India's weak record of fiscal consolidation;  Fitch said.  It cited that government debt fell between the 2007-2008 global financial crisis and FY'15, but then rose gradually despite double-digit nominal GDP growth.

The risks associated with India's high public debt are partly offset by the country's ability to finance its deficit domestically, which is a strength relative to most rated peers.

Fitch forecasts strong GDP growth of 8.7 per cent during 2021-22 and 10 per cent during FY23, supported by the resilience of India's economy, which saw a rapid cyclical recovery from the wave of the delta Covid-19 variant in 2Q21. facility is provided.  It has projected the GDP growth rate to be around seven per cent between FY24 and FY26.

The rating agency said mobility indicators have returned to pre-pandemic levels and high frequency indicators point to strength in the manufacturing sector.

It said the government's production-linked incentive scheme to boost foreign direct investment, labor reforms and the creation of a 'bad bank', as well as an infrastructure investment drive and national monetization pipeline, would require development when fully implemented. should support the view.

Nevertheless, given the uneven nature of economic recovery and the reform implementation risks, there are challenges to this approach.

Even as said immediate financial sector pressure eases, the rating agency still expects credit growth to remain constrained by an average of 6.7 per cent over the next several years, unless adequate recapitalisation. Cannot mitigate the risk currently seen among banks. <span style="display: block;margin-bottom:13px;margin-top:13px;"/> <span style="display: block;margin-bottom:13px;margin-top:13px;"/>    Fitch said the risk is skewed towards higher inflation, given the persistent core inflation, rising energy prices and rising inflation expectations, while forecasting a reduction in inflation to 4.5 per cent by the end of the current fiscal.
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