Fitch upgrades India's outlook to 'stable'

International ratings agency Fitch Wednesday upgraded India's outlook to "stable" from "negative", citing government measures to cut budget deficit and remove bottlenecks to improve investment and growth.

The agency affirmed its sovereign ratings on India at 'BBB-', the lowest investment grade.

"The revision of the outlook to stable reflects the measures taken by the government to contain the budget deficit, including the commitments made in the 2013-14 budget as well as some, albeit limited, progress in addressing some of the structural impediments to investment and economic growth," Fitch said in statement.

The rating agency had scaled down its outlook on India to negative from stable in June 2012, referring to corruptions and absence of economic reforms. Negative outlook meant that the agency had kept the country's sovereign ratings on watch for possible downgrade.

Fitch said it has decided to upgrade its outlook on India to stable on the back of positive macro-economic data and commitments from the government to push forward the economic reforms.

"The authorities were successful in containing the upward pressure on the central government budget deficit in the face of a weaker-than-expected economy," Fitch said.

The central government fiscal deficit was 4.9 percent of the gross domestic product (GDP) in financial year ended March 2013 as compared to 5.7 percent in 2011-12, and Fitch's forecast when it placed India's ratings on negative outlook in June 2012 of close to 6 percent.

Fitch expects the government to broadly meet its 2013-14 budget deficit target of 4.8 percent of GDP and to gradually reduce the high level of public debt over the medium-term.

"General government gross debt as a share of GDP was at 64 percent in 2012-13, significantly higher than both the 'BB' and 'BBB' peer rating group medians of 33 percent and 40 percent respectively. However, it is substantially below the level of 79 percent of GDP when Fitch upgraded India to 'BBB-' in 2006," the agency said.

The agency pointed out that inflation pressures had begun to show more pronounced signs of easing in response to weaker economic conditions and the tightening of monetary conditions by the Reserve Bank of India (RBI) during the course of 2011-2012.

The recent weakness of the exchange rate may, however, complicate policy management and limit the scope for further cuts in RBI policy rates, it said.

On GDP growth, Fitch said it expected the Indian economy to recover. India's GDP expanded by just 5 percent in financial year ended March 31, 2013, the slowest pace in a decade, and 6.2 percent in 2011-12.

"India's economic recovery, however, is likely to remain slow until a healthier investment climate is created, which helps lift potential growth again. As a result, Fitch is forecasting only a modest recovery with real GDP expected to expand 5.7 percent and 6.5 percent in 2013-14 and 2014-15 respectively," it said.