Fitch Ratings has retained India's ratings at 'BBB-' with a stable outlook due to a strong medium-term GDP growth outlook and favourable external finances, including a strong foreign reserves buffer, with a high government debt burden and weak structural features, including a difficult, but improving business environment.
The rating agency has affirmed the country's long-term foreign- and local-currency issuer default ratings at 'BBB-'. The issue ratings on India's senior unsecured foreign- and local-currency bonds are also affirmed at 'BBB-'. The outlooks on the long-term IDRs are stable. The country ceiling is affirmed at 'BBB-' and the short-term foreign-currency IDR at 'F3'.
Fitch forecasts India's real GDP growth to accelerate to 7.5% in the fiscal year ending Mar. 31, 2016 (FY16) and 8.0% in FY17, from 7.3% in FY15, supported by the government's beefed-up capex spending and gradual implementation of a broad-based structural reform agenda. The Reserve Bank of India's (RBI) policy rate cuts of 125bp in total in 2015 are also likely to contribute to higher GDP growth, even though monetary transmission is impaired by relatively weak banking sector balance sheets.
The rating agency said, "The government continues to steadily roll out its ambitious structural reform agenda, as illustrated in recent months by the announcement of new reforms that will likely improve the business environment, including changes in the foreign direct investment (FDI) regime."
"India's relatively weak business environment and standards of governance are gradually improving as a result of the pursued reforms, but obstacles faced by investors, including infrastructure bottlenecks, have not been reduced overnight. India moved up four places in the World Bank's Ease of Doing Business rankings in 2015, but is still the worst-performing of all 'BBB' range sovereigns at 130th out of 189 countries," said Fitch
India's sovereign ratings continue to be constrained by limited improvement in its fiscal position. The seventh Pay Commission's recommendation of a 23.6% increase in remuneration for central government employees raises doubts about the feasibility of the medium-term consolidation path without any new revenue-generating measures.
Fitch expects a general government fiscal deficit, including both the central government and the states, of 6.7% in FY16, more than double the 'BBB' peer median of 2.8%. Fitch expects the general government debt burden to rise to 68.8% of GDP in FY16 from 66.8% in FY15, one of the highest of 'BBB' range sovereigns and far off the 'BBB' category median of 42.8% of GDP.
Fitch noted, "Inflation in India averaged 7.9% over the past five years, comparing unfavourably with the 'BBB' peer median of 3.3%. However, a structural reduction in the consumer price inflation level, likely supported by the monetary policy framework changes in February 2015, strengthens India's sovereign credit profile."
The rating agency also warned that India is not immune to external shocks, but seems less vulnerable than many of its peers. External vulnerabilities have reduced substantially in the past two years, particularly its narrowed current-account deficit, which Fitch expects to reach 1.1% in FY16 compared with the 'BBB' median of 5.6%, and a build-up of reserves to 7.7 months of current external payments.
"Public sector banks form a contingent liability for the government's finances in the years ahead. The banking sector's non-performing loans, which Fitch expects to reach 4.9% of total assets in FY16, are likely to hamper banks' ability to internally generate capital at a time when they will require capital to transition towards Basel III by FY19. It remains to be seen if the government's planned capital infusion of Rs. 700bn into the public sector banks will be adequate in light of supervisory norms and weak equity valuations," added Fitch.
