Fitch Ratings, on Tuesday, downgraded India’s sovereign rating to ‘BBB-‘ with a negative outlook, claiming that the rating action creates a balance between a still-strong medium-term growth forecast and external resilience and high public debt and a weak banking sector.
Higher debt levels pose limitations, whereas India’s strong medium-term growth forecast is a key supporting factor for the rating, it said.
“The medium-term debt trajectory remains core to our rating assessment, as higher debt levels constrain the government’s ability to respond to shocks and could lead to a crowding out of financing for the private sector, in our view. General government debt rose to 89.6% of GDP in FY21, the highest of ‘BBB’ emerging-market sovereigns. We forecast the ratio to decline slightly to 89.0%, still well above the 60.3% ‘BBB’ median in 2021,” the rating agency said in its assessment.
The ability to pay its deficits domestically, which is a positive relative to most ‘BBB’ peers, offsets some of the risks linked with India’s large public debt, it added. Foreign currency government debt represents only 6% of total debt, compared to 33% for BBB peers.
The government has also taken necessary steps toward the country’s possible inclusion in global bond indices, which might be a supporting actor in terms of credit standpoint because it would open up new sources of funding.
“We forecast robust GDP growth of 8.7% in the fiscal year ending March 2022 (FY22) and 10.0% in FY23, supported by the resilience of India’s economy, which has facilitated a swift cyclical recovery from the Delta Covid-19 variant wave in 2Q21. Mobility indicators have returned to pre-pandemic levels and high-frequency indicators point to strength in the manufacturing sector. The potential remains for a resurgence in coronavirus cases, though we anticipate the economic impact of further outbreaks would be less pronounced than previous surges, particularly given the sustained improvement in the Covid-19 vaccination rate, which has now surpassed 1 billion doses administered,” said Fitch.
Last month, Moody’s Investors Service announced India’s sovereign rating and revised its outlook to ‘stable’, from ‘negative’ saying the economy’s and financial system’s negative risks are receding.