Fitch Ratings on Tuesday affirmed India’s sovereign rating at ‘BBB-‘ with a negative outlook.
According to Fitch Ratings, India’s rating balances a still-strong medium-term growth outlook and external resilience from solid foreign-reserve buffers, against high public debt, a weak financial sector and some lagging structural issues.
“The country’s rapid economic recovery from the Covid-19 pandemic and easing financial sector pressures are narrowing risks to the medium-term growth outlook. However, the negative outlook on the rating reflects lingering uncertainty around the medium-term debt trajectory, particularly given India’s limited fiscal headroom relative to rating peers,” it said.
As per the ratings agency, India’s GDP is likley to grow by 8.7 per cent in the fiscal year ending March 2022 (FY22) and 10 per cent in FY23, supported by the resilience of India’s economy, which has facilitated a swift cyclical recovery from the Covid wave in 2Q21.
“Mobility indicators have returned to pre-pandemic levels and high-frequency indicators point to strength in the manufacturing sector. The potential remains for a resurgence in coronavirus cases, though we anti cipate the economic impact of further outbreaks would be less pronounced tha n previous surges, particularly given the sustained improvement in the Covid -19 vaccination rate, which has now surpassed 1 billion doses administered,” the ratings agency said.
The agency cited India’s strong medium-term growth outlook relative to peers as a key supporting factor for the rating and an important driver of the current baseline of a modestly declining public debt trajectory.
“We forecast growth at around 7 per cent between FY24 and FY26, supported by the government’s reform agenda and the closing of the negative output resulting from the pandemic shock.
“The government’s production-linked incentive scheme to boost foreign direct investment, labour reform and the creation of a ‘bad bank’, along with an infrastructure investment drive and the ‘national monetisation pipeline’ should support the growth outlook if fully implemented,” it said.
The agency pointed out challenges to this outlook, given the uneven nature of the economic recovery and reform implementation risks.
“We believe immediate financial-sector pressure has eased, in part due to regulatory forbearance measures that are providing banks with time to rebuild capital buffers.
“The level of asset quality deterioration from the pandemic, while masked by forbearance relief, also appears less severe than what we had anticipated,” it said.
In addition, it said that the recently incorporated ‘National Asset Reconstruction Company’ (bad bank) could help banks address the expected build-up of impaired loans, while sustaining adequate credit growth, though more details are needed to fully assess its potential.
“Still, we expect credit growth to remain constrained, averaging at 6.7 per cent YoY over the next several years, unless adequate recapitaliasation can mitigate the risk aversion currently seen among the banks,” the ratings agency said.