Fitch affirms India’s rating at 'BBB-' with a stable outlook

Fitch affirms India's rating

Global ratings agency Fitch Ratings affirmed India’s rating at 'BBB-' with a stable outlook on August 29, on the back of strong medium term growth outlook and improving fiscal credibility.

“Strengthening fiscal credibility from recent achievement of deficit targets, enhanced transparency and buoyant revenues, have increased the likelihood that government debt can follow a modest downward trend in the medium term,” the rating agency noted.

The government set a lower fiscal deficit target of 4.9 percent in the Budget presented on July 23 compared with 5.1 percent set in the Interim Budget.

"Fiscal consolidation by the central government is advancing more quickly than we expected, even as capex remains high, signaling commitment to reduce deficits. We forecast the FY25 deficit to reach 4.9% of GDP, in line with the July budget," Fitch noted.

The rating agency expects the general government deficit (states and centre combined) to fall to 7.3 perecent by FY26 and 6.6 percent by FY29.

Public debt is also expected to fall to 78 percent by FY29.

"The debt trajectory remains highly sensitive to growth outcomes and clear risks to this path remain, particularly if nominal growth slips below double digits or if consolidation efforts stall," it said.

It also pointed out that the election results also signalled a broad continuity, but the coalition politics is likely to constraint the government’s ability to enact reforms.

“Policy continuity around the infrastructure drive, digitalisation and ease of doing business measures supports growth, but coalition politics and a weakened mandate will likely constrain the government's ability to enact major economic reforms, limiting upside to potential growth,” it said.

The rating agency highlighted that the Indian economy is expected to expand 7.2 percent in FY25 and projected inflation to cool down to 4.6 percent for the year, further falling to 4.4 percent in FY26. For FY25, the agency predicts 6.5 percent growth.

"Public infrastructure capex remains a key growth driver and has improved spending quality, helping mitigate the drag from fiscal consolidation. Private investment in real estate is likely to remain strong and there are signs of a nascent pick-up in manufacturing investment," it said.

On the rate cut, Fitch pointed out that risks are tilted to fewer cuts given RBI's hawkish stance on food inflation.

In June, Fitch had revised India's growth forecast upward to 7.2 percent from 7 percent projected earlier. For the medium term, Fitch pointed out that the economy's potential growth at 6.2 percent.

"India's external finances remain a rating strength, underpinned by high FX reserves, a net external creditor position, and a low current account deficit (CAD)," it added as a further advantage for India.

"India's comparative advantage in services will continue to boost exports and offer a buffer against commodity price shocks," it added.

Fitch flagged subdued consumption as a risk to private investment cycle, which it said could hamper job creation.

"Fiscal metrics remain a credit weakness, with deficits, debt and debt service burden all high compared to 'BBB' range peers. Lagging structural metrics, including governance indicators and GDP per capita, also weigh on the rating," it said.