Easing inflation a positive, growth challenges loom: Fitch

In a breather to the government and the economy, which have been swamped with bad news for many months now, global rating agency Fitch has upgraded the country's sovereign credit outlook to stable from negative.

Art Woo, director, Fitch Asia Sovereign Ratings says the rating agency acknowledges the moves by the Indian government to address the fiscal deficit problem.

Woo says there has been a structural shift in the economy, though it is early to judge the reform measures initiated by the government.

Easing of inflation is an added positive for the economy, but other challenges loom, said Woo.

The two key headwinds right now are weak growth and the high current account deficit, Woo said.

Industrial output data for April announced Wednesday was a lower-than-expected 2.0 percent and consumer inflation for May at 9.31 percent was above market estimate of 8.9 percent. Given weak growth, it makes sense for the RBI to cut rate. Yet, many experts feel a rate could further weaken the already battered rupee which is hovering around a record low.

Below is the edited transcript of Woo's interview to CNBC-TV18.

Q: Earlier there was some bad blood between Fitch and the Indian government on apparently sharing India's rating file with the US Securities and Exchange Commission (SEC). This outlook change has nothing to do in terms of a conciliatory gesture with the Indian government right?

A: I am probably not the most appropriate person to comment on this. Just as per our normal practice, our information is treated as confidential and we are an independent rating agency. So, no outside entity has ability to influence our ratings.

Q: This rating outlook change comes as a bit of surprise for people watching the economy right now primarily because of what has happened globally, what has happened with the currency and the kind of impact there could be on the current account deficit (CAD). What made you take this decision in terms of a rating outlook at this point where there is uncertainty not just locally but globally as well?

A: When one looks at the developments over the past year, since we actually put our original outlook on negative back in June 2012, there have been some notable developments particularly efforts to correct the public finances or the fiscal situation by lowering the fiscal deficit in FY13. Some action has been taken on the structural side of the economy, there have been measures implemented to help improve the investment climate, opening up FDI. There has been some action from the Cabinet Committee on Investment (CCI) to help the approval process.

It is not all blue skies ahead, of course there are challenges, that growth outlook has certainly turned out weaker than we had anticipated. At the same time inflation has come down, so that is a positive.

We recognise that the growth outlook is weak, business confidence is down and the current account has obviously widened over the past year or in recent years to be quite frank. Obviously, that becomes a bit more difficult to finance particularly when there is heightened global risk aversion which seems to be the case right now but it is likely to be temporary in our view. We also have to acknowledge many emerging markets have seen their currencies come under pressure as there has been a shift in global liquidity.