Fitch refuses to upgrade India's credit ratings for the 12th year in a row

Refusing to upgrade India's credit rating for the 12th year in a row, Fitch today retained its sovereign rating at 'BBB-', the lowest investment grade with a stable outlook, saying that weak fiscal balances continue to constrain its ratings.

The government had made a strong pitch to Fitch Ratings for an upgrade after rival Moody's Investors Service last November gave the country its first sovereign rating upgrade since 2004.

Fitch had last upgraded India's sovereign rating from BB+ to BBB- with a stable outlook on August 1, 2006.

"Fitch Ratings has affirmed India's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB-' with a stable outlook," the rating agency said in a statement.

"India's rating balances a strong medium-term growth outlook and favourable external balances with weak fiscal finances and some lagging structural factors, including governance standards and a still-difficult, but improving, business environment," it said.

Fitch added that weak fiscal balances, the Achilles' heel in India's credit profile, continue to constrain its ratings.

"General government debt amounted to 69 per cent of GDP in 2017-18 fiscal while fiscal slippage of 0.3 per cent of GDP in both FY18 and FY19 relative to the government's own budget targets of last year, implies a general government deficit of 7.1 per cent of GDP," it said.

The government aims to gradually reduce its fiscal deficit from 3.5 per cent of GDP in 2017-18, but would not hit the 3 per cent ceiling of the Fiscal Responsibility and Budget Management (FRBM) Act before March 2021, which is well beyond its current electoral term, Fitch said.

"The Indian economy is less developed on a number of metrics than many of its peers. Governance continues to be weak, as illustrated by a low score for the World Bank governance indicator. India's ranking on the United Nations Human Development Index also indicates relatively low basic human development," it said.

After the last rating upgrade on August 1, 2006, Fitch had changed the outlook to negative in 2012 and then again to stable in the following year, though it kept the rating unchanged at the lowest investment grade.

The Fitch review for annual sovereign rating follows India's rating upgrade by Moody's after a gap of 14 years, while S&P retained its rating for the country.

While Moody's had in November 2017 raised India's sovereign rating from the lowest investment grade of 'Baa3' to 'Baa2', S&P refrained from upgrading the rating from 'BBB-' citing high government debt and low income levels. S&P has maintained 'BBB-' rating on India since 2007.

On rating drivers, Fitch today said a favourable economic growth outlook continues to support India's credit profile, even though real GDP growth fell to 6.6 per cent in the fiscal year ended 31 March 2018 (FY18) from 7.1 per cent in 2016-17.

Fitch forecast that growth will rebound to 7.3 per cent in FY19 and 7.5 per cent in FY20.

India's five-year average real GDP growth of 7.1 per cent is the highest in the region and among 'BBB' range peers, it said. Stating that growth has the potential to remain high for a substantial period of time, Fitch said per capita GDP is the lowest among 'BBB' range peers and continued structural reform implementation should enhance productivity.

India has the highest medium-term growth potential among the largest emerging markets, according to a recent Fitch analysis.

The rating agency said Reserve Bank of India (RBI) is building a solid monetary policy record, as consumer price inflation has been well within the target range of 4 per cent since the inception of the Monetary Policy Committee in October 2016.

Fitch expected inflation to average close to 4.9 per cent in FY19, still almost double the 'BBB' range median of 2.5 per cent for 2018.

"We expect the RBI to start raising its policy repo rate next year from 6 per cent currently as growth gains further traction," it said. "Monetary tightening could be brought forward if recent government policies push up inflation expectations, including the decision to increase minimum support prices for agricultural goods to 1.5 times the cost of production and increased customs duties on certain products, including electronics, textiles and auto parts."

India's relatively strong external buffers and the comparatively closed nature of its economy make the country less vulnerable to external shocks than many of its peers. Foreign reserves equal 8.3 months of current external payments while gross and net external debt levels also compare well.

However, net FDI inflows fell to USD 23.7 billion in the first three-quarters of FY18 from USD 30.6 billion a year earlier.

The government has continued to gradually open the economy to foreign investors, including allowing 100 per cent FDI in the single-brand retail through the automatic route since January 2018.

Such measures may facilitate a recovery in FDI, particularly if combined with further investment climate reforms. India rose 30 places in the World Bank's Ease of Doing Business ranking in 2017 and has ample potential to improve its position further, as it still ranks below both the 'BBB' and 'BB' medians.