Fitch revises India's outlook to stable from negative

Moneycontrol Bureau

In what could be a breather to the stressed-out government, Fitch Ratings has revised India's outlook to stable from negative, affirming a BBB- rating.  Fitch's revision is based on the conviction that government has taken steps to contain fiscal deficit and would meet FY14 budget deficit target of 4.8 percent. The rating upgrade is certainly going to have a positive effect on the markets on Thursday. 

Just a few weeks ago, Standard & Poor's had reiterated its negative outlook on India's credit rating, one notch above 'junk'. Experts say that  S&P is the bigger rating agency and therefore its rating is more important. 

Fitch sees India’s GDP at 5.7 percent for the current financial year, while the government's economic survey pegs it between 6.1-6.7 percent. The rating agency expects India’s GDP for FY15 to be at 6.5 percent. Fitch also maintained that the banks' profitability will remain under pressure but they won't pose material risk to macro stability.  

Following the upgrade, the rupee strengthened and closed at 57.79, after touching an intra-day low of 58.38.     

Meanwhile, Montek Singh Ahluwalia, pleased with the Fitch upgrade, told CNBC-TV18  that the report reflects the fact that economy is better placed. The government is considering taking more steps to boost economy, he said.

Fitch and other rating agencies normally look at performances over the past six months. So what they are reacting to is perhaps initiatives announced by finance minister September onwards, and the fact that they have kept pace with the diesel price hikes, analyses Latha Venkatesh of CNBC-TV18.

Last year’s fiscal deficit was 4.89 percent, against the feared 5.4 percent and the budgeted 5.1 percent. So far in this, the government has adhered to the promise of reducing subsidies. All that has led to a positive outlook on rating, though the grade itself has not been changed, she said.

Venkatesh asserts that S&P was perhaps wise to have refrained from changing its outlook anytime soon, because of continued talks of Food Bill coming in as an ordinance. "The battle against fiscal deficit has not been won. ...A Food Bill ordinance at this point in time is sure to have foreign funds questioning the commitment to fiscal deficit and rating agencies will once again start perhaps putting out negative notes."

The rating upgrade actually benefits bonds put out by Indian corporates. So, if an Indian corporate puts out a bond at this point in time, then it may hope to benefit from the positive statement coming in from Fitch.

Venkatesh remainds that while the other rating agency still stands with its negative outlook, there are tough issues like a wobbling currency market and an impending Food Security Bill. "This is just going to be a positive sentiment for the little bit that it is worth. Indian companies or any corporates are not going to raise money when the rupee is in such shape."