Fitch upgrades India outlook to stable from negative

Pares 2022-23 growth to 7.8%, expects inflation to average 6.9%

Fitch Ratings revised India’s outlook from ‘negative’ to ‘stable’ on Friday, June 10, 2022, citing fading downside risks to medium-term growth thanks to a rapid economic recovery and easing of weaknesses in the financial sector.

The global rating firm has, however, lowered its GDP growth forecast for 2022-23 from 8.5% projected in March to 7.8% due to the impact of inflation on the growth momentum

Despite near-term headwinds from the global commodity price shock, Fitch said it expects robust growth for India relative to its similarly rated peers, but the country’s public finances remain a credit weakness with the debt ratio broadly stabilising, based on its expectations of ‘persistent large deficits’.

The firm affirmed India’s long-term foreign currency issuer default rating at ‘BBB-’ while revising the outlook, noting that this ‘balances India’s external resilience from solid foreign-exchange reserve buffers against some lagging structural indicators’. A BBB rating reflects low expectations of default risk with adequate capacity for payment of financial commitments, although adverse business or economic conditions are more likely to impair this capacity.

While high nominal GDP growth has facilitated a near-term reduction in India’s debt-to-GDP ratio, Fitch Ratings said higher subsidies this year along with the excise duty cuts on fuel to offset the surge in consumer prices will cost about 0.8% of GDP. This will push the fiscal deficit of the Centre to 6.8% of GDP from the 6.4% Budget target for 2022-23, despite robust revenues, it reckoned.  

“We forecast India’s general government fiscal deficit to remain broadly stable at 10.5% of GDP (excluding divestment) in 2022-23, compared to 10.7% in 2021-22,” Fitch said in its rating action commentary.  

In the medium term, Fitch Ratings expects India’s growth of around 7% between 2023-24 and 2026-27, underpinned by the government’s infrastructure push, reform agenda and easing pressures in the financial sector, stressing that this strong growth outlook is a key driver for its decision as it will sustain a ‘gradual’ uptick in credit metrics.