Fitch Ratings on Friday reaffirmed India’s sovereign credit rating at the lowest investment grade (BBB-) with stable outlook, holding that India's rating balances a still strong medium-term growth outlook compared with 'BBB' category peers and relative external resilience.
Last month, rating agency Moody’s Investors Service had revised India’s sovereign rating outlook to negative from stable while reiterating its credit rating of Baa2 which is the second lowest investment grade score. Earlier this month, Standard & Poor’s retained India’s rating at the lowest investment grade with stable outlook.
“Our outlook on India's GDP growth is still solid against that of peers, even though growth has decelerated significantly over the past few quarters, due mainly to domestic factors, in particular a squeeze in credit availability from non-banking financial companies (NBFC) and deterioration in business and consumer confidence," Fitch said.
Fitch expects India’s growth to slow to 4.6% in the financial year ending March 2020 from 6.8% in FY19, which it maintained is still higher than the 'BBB' median of 2.8%. “We expect growth to gradually recover to 5.6% in FY21 and 6.5% in FY22 with support from easing monetary and fiscal policy and structural measures that may also support growth over the medium term," it added.
The rating agency said the affirmation of the sovereign rating incorporates its expectation of moderate fiscal slippage relative to the central government's deficit target of 3.3% of GDP in FY20. “The government is again facing a trade-off between stimulating the economy and reducing the deficit in the medium term. Some fiscal slippage has occurred in recent years against government targets, even during periods of sustained stronger growth. The FY20 deficit target had already been exceeded by end-October due to a weak revenue intake, and a deceleration of nominal quarterly growth suggests further revenue pressure for the rest of the financial year," it added.
The government has indicated that its corporate tax rate cut could lower revenue by 0.7% of GDP in FY20 and that it hopes to finance spending by more aggressive asset divestments, including that of Air India and Bharat Petroleum Corporation Limited. “We believe there is a risk of more significant fiscal loosening in the event of continued weak GDP growth, for example, in the context of lingering problems in the NBFC sector," Fitch said.
Fitch expects the Reserve Bank of India (RBI) to cut its policy rate by another 65bps in 2020, after a cumulative 135bp easing since February 2019. “The uptick in inflation to 5.5% in November appears to reflect a temporary spike in food inflation, while pressure on core inflation, which remained stable at 3.5%, seems limited in the current environment. The RBI has built a solid monetary policy record since the inception of the Monetary Policy Committee in October 2016, with headline inflation remaining within the medium-term inflation target range of 4% +/- 2%," it said.
The rating agency believes that the government will likely remain focused on reforms during the second term of Prime Minister Narendra Modi. “It has announced some structural measures over recent months to counter the growth slowdown, including efforts to reduce red tape and boost foreign direct investment. It also plans to consolidate the state-owned banks. The positive impact of these reforms on growth is likely to materialise in the medium term, rather than the near term, and will depend on the details and implementation," Fitch said.