Fitch affirms BBB- rating for India, maintains stable outlook

The Fitch Ratings logo is seen at their offices at Canary Wharf financial district in London (Image: Reuters)

Fitch Ratings on December 20 said it has affirmed India's long-term foreign-currency issuer default rating (IDR) at 'BBB-' while maintaining the "stable outlook" that it assigned to the country in June this year.

India's rating reflects "strengths from a robust growth outlook compared to peers and still-resilient external finances", which have supported India in navigating the large external shocks during the past year, the New York-based rating agency said.

Simultaneously, Fitch also flagged India's "weak public finances", illustrated by "high deficits and debt relative to peers".

According to the agency, India's economy is likely to grow at 7 percent in the fiscal ending March 2023. The forecast is underpinned by by "sustained consumption" and "investment recoveries", it added.

India is "somewhat insulated" from the gloomy global outlook in 2023, given its modest reliance on external demand, Fitch stated, but noted that the agency expects "declining exports, heightened uncertainty and higher interest rates" to slow growth to 6.2 percent in FY24.

Stable financial sector

Financial sector risks continue to ease on the back of the strong and durable economic recovery, Fitch said.

"Credit growth has picked up rapidly, and we expect these trends to be sustained on the back of resilient credit demand and increased risk appetite, provided capitalisation is well-managed. The normalisation of domestic liquidity conditions is partly mitigated by high deposit funding," it claimed.

Fitch also noted that India's robust medium-term growth outlook is a key supporting factor for the rating which it has assigned.

"A clear improvement in corporate and bank balance sheets, which were under strain prior to the pandemic, is likely to facilitate a steady acceleration in investment in the coming years," it said, adding that the government's ongoing infrastructure drive and reform agenda, along with efforts to attract greater FDI inflows, supplement these prospects.

High fiscal deficit

Fitch said it expects modest fiscal slippage in FY23 with a deficit of 6.6 percent of GDP (including disinvestment), as against the government's target of 6.4 percent.

The slippage, according to the agency, is due to higher food and fertiliser subsidies. But revenue growth and expenditure switching will contain the measures' fiscal toll while allowing capital spending to remain a priority, it added.

Fitch's latest fiscal deficit forecast for India is lower as compared to its June review when it had given a general government deficit forecast of 10.5 percent.

Repo rate at 6.25%

Fitch sees the Reserve Bank of India (RBI) keeping the repo rate "on hold at 6.25 percent through FY24", following a cumulative 225 basis points hike between April and December 2022.

"Risks are tilted toward slightly more tightening as core inflation remains sticky at around 6 percent and market expectations around Fed rate hikes could remain volatile," it, however, pointed out.

After peaking for several months, the headline inflation in India fall to 5.88 percent in November, which is in between the RBI's target range of 2-6 percent.