SENSEX NIFTY
Jun 18, 2012, 10.41 PM IST | Source: CNBC-TV18

India's economic prospects have weakened: Fitch Ratings

Fitch Ratings has revised India's outlook to negative from stable. In an interview to CNBC-TV18, Art Woo, director of Fitch Ratings says, India’s economic and fiscal prospects have weakened.

Fitch Ratings has revised India's outlook to negative from stable . In an interview to CNBC-TV18, Art Woo, director of Fitch Ratings says, India’s economic and fiscal prospects have weakened. “We became quite aware that the government is having a tough time improving the investment climate. It seems to be hindering growth prospects off late. So, that’s how we came about with the negative outlook,” he elaborates.

The negative outlook, he says, more precisely means that over the next 12-24 months there is a probability or more than a likely chance that India’s ratings could be downgraded.

Also read: Kaushik Basu blames Fitch revision on 'herd mentality'

Below is the edited transcript of his interview on CNBC-TV18. Also watch the accompanying video.

Q: What exactly was the tipping point? We got the GDP numbers fairly early, atleast about three weeks ago, what accounts for this rating cut or rather negative outlook now?

A: I don’t think there is any particular timing. In our view, sovereign ratings around the region, around the world are periodically or annually. We were in India recently. I felt the timing just came up where we were assessing India across a broad range of factors, ranging from the macro economic policy, economy, public finances, external finances and structural issues.

It appeared to us that the countries economic and fiscal prospects had weakened. That is a combination of slowing growth, and rising inflationary pressures. The public finances, at the centre, have weakened. So, we became quite aware that the government is having a tough time improving the investment climate. It seems to be hindering growth prospects off late. So, that’s how we came about with the negative outlook.

Q: Normally, how much time do you give government’s to mend their work?

A: There is no particular timeframe. We are always watching various sovereigns in this case India and other sovereigns around the region and around the world to access their prospects and their credit worthiness. The negative outlook more precisely means that over the next 12-24 months there is a probability or more than a likely chance that India’s ratings could be downgraded. So, there is still a large window here where we are going to be still accessing developments.

There are a number of rating drivers that we are watching out for. Sharp improvement in this fiscal, consolidation process, material improvement in the growth outlook or material improvement in inflation and an improvement in the investment climate should certainly be supportive developments from the ratings.

Conversely, if there is deterioration in the growth for fiscal outlook, that obviously wouldn’t be helpful. If we see a change in the general government debt dynamics where fiscal policy starts to expand and the general government debt to GDP ratio begins to rise, that would certainly be a negative development.

Q: You said 12-24 months at the start of your answer; would that be a good thumb rule?

A: That’s generally a good thumb rule that we are following.

Q: Today, the RBI did not cut rates, which some people were expecting. The RBI’s reason was that just six weeks ago it gave a 50 bps rate cut and since then it has not seen enough progress on fiscal discipline or on reduction of the fiscal deficit from the government. It also says it doesn’t see interest rates as the key reason why growth is doing badly. Would the RBI’s monetary policy be a key input to your rating decision today?

A: Not necessarily. We are following trends on a more longer term time horizon. Our concerns were in terms of growth and inflation dynamics. Obviously inflationary pressures have been elevated in India for a quite a long time. So, obviously RBI has delicate balance to play in terms of making sure it contains inflation and helps support growth. At this current juncture of the economic cycle, the economy has slowed down. They have recently cut rates by 50 bps in middle of April.

Secondly, inflationary pressures have begun to accelerate or reaccelerate a little. We have seen it in headline, WPI. But it is reflected that inflationary pressures are still elevated. It’s not easy for the RBI just to cut rates as low as they go, as low as they would like to see it because they have to be mindful of inflation. The exchange rate has come under pressure. So, the balance of payments has been under pressure, which is reflected by the decline in the foreign reserves. So, I think there is a delicate balancing act that they have to be mindful of.

Q: Is there any threshold of reserves or of external debt that could worsen the chances for India?

A: There is always a threshold.

Q: What might lead you to change it back from negative to stable? Which will be the key parameters you would look at?

A: Some of the key parameters we are working out would be just a general economic outlook. The balance between growth and inflation, acceleration in growth and a decline in inflation would be helpful. An improvement in the fiscal consolidation process would be helpful. More broadly, speaking structural finance would be very helpful. Measures that would help improve the investment climate, help improve the infrastructure investments, help improve the fiscal position into the long-run would be certainly helpful.

READ MORE ON  Fitch Ratings, Art Woo

ADS BY GOOGLE

video of the day

Positive on PSU banks; NPA cycle may have peaked: Barclays

Explore Moneycontrol

Copyright © e-Eighteen.com Ltd. All rights reserved. Reproduction of news articles, photos, videos or any other content in whole or in part in any form or medium without express written permission of moneycontrol.com is prohibited.