Major takeaways from the Fitch sovereign rating announcement
In the global ratings game, S&P, Moody’s and Fitch dominate as the 3 most influential players. In its latest review on 16-Nov, Fitch did not raise the rating outlook for India. Here are key takeaways from the Fitch rating opinion.
- In any rating opinion, there are two aspects viz the actual rating and the rating outlook. The rating outlook acts as a kind of buffer from any immediate downgrade and gives a comfort zone for lenders. In the case of Fitch, it has maintained the rating at “BBB-”, which is lowest investment grade. However, Fitch also maintained outlook at Negative.
- This is contrary to what Moody’s had done just a couple of months back. Moody’s had held India’s sovereign rating at equivalent of “Baa3”, but it had raised the outlook from Negative to Neutral, in the light of the fact that the Indian economy had recovered sharply from the lag effect of COVID-19 pandemic.
- According to Fitch, its rating and outlook decision was an outcome of its twin-edged view. Fitch is positive on the strong medium-term growth outlook as well as external resilience due to India’s $650 billion forex chest. However, Fitch is concerned about the medium-term trajectory of debt in the light of the burgeoning fiscal deficit.
- Fitch remains very positive on GDP growth outlook. It has projected GDP to grow at 8.7% in FY22 and at 10% in FY23. Fitch also noted that the recovery from COVID was quick due to a combination of monetary measures of RBI and fiscal measures of the government. Commending the vaccine progress, Fitch expects future variants to have limited impact.
- Fitch has pointed to some more positives on the India story. It expects GDP to sustain at over 7% between FY24 and FY26. This would be achieved by the closing of the negative output gap as well as government reforms including FDI liberalization, aggressive program of privatization and the all-important product linked incentives (PLI).
- On the positive side, Fitch has also highlighted that the infrastructure thrust via the announcement of National Monetisation Pipeline (NMP) will catalyse growth by reducing the logistics costs and improving the competitiveness of Indian business. Fitch expects trade to play a key role in the India growth story.
- However, Fitch also sees key concerns. The first concern pertains to the banking system. It is of the view that regulatory forbearance may have helped banks tide over the crisis but the real situation would be visible only when the water recedes. Fitch believes that due to COVID lag effect, credit growth would be restrained at around 6.7%.
- The second area of concern highlighted by Fitch is the progress on fiscal consolidation. The overall fiscal deficit of centre plus states was likely to come down to 10.6% in FY22 from 13.6% in FY21. However, a lot would predicate on the success of the ambitious divestment of LIC. That is the X-factor at this point.
- One of the areas of concern is the comparison of the debt servicing of India with the peer group. For example, Fitch forecasts interest payments / revenue ratio of 28.2% in FY22. This is much higher than the median of 6.9% for the comparable peer group in the same rating bracket. Fitch has also pointed out that extending the fiscal deficit target of 4.5% to 2026 does not inspire too much confidence in terms of fiscal responsibility.
- Another area of concern expressed by Fitch is the ratio of government debt to GDP, which is estimated at 89% for FY22. It is likely to remain at around 86.9% even in FY26, much above the median of the peer group, which is closed to 60%. Less reliance on foreign debt has meant that India has funded the deficit domestically. However, Fitch is of the view that such high levels are not conducive to currency stability.
Summing up the Fitch rating view
In a nutshell, Fitch has decided not to upgrade the rating outlook as it believes the current risks outweigh the positive growth traction achieved by India. One such risk is inflation, considering that India’s core inflation continues to persist above 6% levels even in Oct-21. That is a classic outcome of supply chain constraints and could impact real returns.
To sum it up, Fitch remains positive on growth, reforms and the post-pandemic recovery. However it is cautious about fiscal deficit, public debt and the risk that higher inflation could derail real GDP growth. In balance, it opted to maintain status quo.