Mumbai: Credit rating agency Fitch Ratings on Tuesday cut its outlook on India’s long-term borrowings in local currency to “negative” from “stable” on concerns the government’s fiscal health is deteriorating.
Theoretically, this means Indian firms and government are more likely to default on their rupee-denominated borrowings than before.
However, in reality, the revision is to capture the risk and highlight the trigger point, the widening fiscal deficit in this case.
Bond yields rose and the local currency weakened following the downgrade. The yield on the benchmark 10-year bond rose to 9.48% from Monday’s close of 9.38%. The rupee meanwhile declined by 0.7% to close at 43.24 to a dollar.
“The revision to the local currency outlook is based on a considerable deterioration in the Central government’s fiscal position in 2008-09 … combined with a notable increase in government debt issuance to finance subsidies,” said James McCormack, head of Asia Sovereign ratings at Fitch.
Fitch expects the fiscal deficit to widen from 2.8% of gross domestic product (GDP) in fiscal 2008 to 4.5% in fiscal 2009, based in part on higher subsidies interest payments and wages. It expects the deficit to widen further to 6.5% in the year because of off-budget items such as the bonds issued to oil and fertilizer companies.
Among other global rating agencies, Standard and Poor’s (S&P) on 10 July had said it might consider lowering India’s sovereign rating to “speculative” from “stable” if the uncertainties in the economy continues. It has for now affirmed its ‘BBB-’ rating.
Moody’s foreign currency rating for India, at Baa3, is already equivalent to where the Fitch and S&P ratings are, according to Aninda Mitra, India sovereign ratings analyst at Moody’s Investors Service.
“The local currency bond rating for the sovereign is Ba2, which is two notches below that of Fitch and S&P,” Mitra said. “The gap between the two ratings reflects a lot of the weaknesses that we have started to see on the fiscal front,” Mitra added.
Fitch kept the rating for the local currency intact at ‘BBB-’. It also affirmed India’s long-term foreign currency rating at ‘BBB-’ with a stable outlook, and its short-term foreign currency rating at ‘F3’ and country ceiling at ‘BBB-’.
According to the agency’s methodologies, the long-term ‘BBB’ national ratings denote “adequate credit risk” relative to other issuers.
However, a country’s economic conditions are more likely to affect the timely payment for these borrowers than the companies with a higher rating. The best rating in the class is AAA.
‘F3’ is a short-term credit rating indicating adequate capacity for timely payment. However, such capacity is more susceptible to near-term adverse changes than for financial commitments in higher-rated categories. The best in the class is F1.
India’s foreign currency rating was not changed because of the vast amount of foreign reserves available with the country.