Currency slide no trigger for changing India's stable outlook: Fitch

Says sharp fall in Indian rupee indicates large or growing current account deficits whose funding has been complicated by a reversal of global portfolio capital

Global agency Fitch Ratings said on Thursday the rupee depreciation would not trigger a change in its ratings and the key to economic stability in India would be policy management.

“Policy management would be the key factor in determining whether economic and financial stability is maintained in India following the intensified pressure on currencies and asset prices,” Fitch said, adding these pressures had “exceeded those on other emerging Asian economies”. Fitch maintained this did not account for a change in rating at present for the Indian economy.” The ratings already incorporate both, a recognition of vulnerability and some tolerance for volatility in market conditions,” said the firm.

However, it also warned India of a negative outlook if it did not contain widening fiscal deficits or sustained higher inflation.

Stating the three reasons for maintaining a stable outlook on India, Fitch said the reasons were sizeable foreign-exchange reserves, corrected economic policies and structural reforms.

“We expect fiscal policy restraint to persist, in line with last year's result, with the budget deficit remaining within five per cent of gross domestic product...structural reforms should help to shore up public finances over the medium-term, potentially supporting domestic savings and, ultimately, reducing external deficits,” said the rating agency.

The rupee on Thursday breached the 65-a-dollar mark to reach an all-time intra day low of 65.66/$ in early trade.

Fitch said the sharp fall in the Indian rupee indicated large or growing current account deficit “whose funding has been complicated by a reversal of global portfolio capital.”

The firm further said the current volatility in the market could persist for some time on account of continuing uncertainty over the timing and magnitude of an eventual unwinding of global central banks’ quantitative easing.

The rating agency added that supply-side reforms that were taking place, would take time to implement but could boost sustainable growth rates and attract greater foreign investment inflows.