Fitch Ratings Affirms India’s ‘BBB-‘ Rating: Robust Growth Amid Fiscal Challenges and ESG Considerations

Rating Overview:
Fitch Ratings has affirmed India’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BBB-‘ with a Stable Outlook. This decision is influenced by several key drivers and considerations outlined below.

1. Robust Growth, Fiscal Challenges:
– India’s rating is supported by robust medium-term GDP growth and sound external finances.
– Weak public finances, indicated by high deficits, debt, and interest/revenue ratio compared to peers, remain a significant constraint.

2. Growth Outperforming Peers:
– India is expected to be one of the fastest-growing countries globally.
– Forecasted GDP growth for FY24 is 6.9%, driven by government capex and gradual acceleration in private investment.

3. Strong Growth Prospects:
– India’s potential GDP growth is estimated at 6.2%, supported by infrastructure development, private investment, and favorable demographics.
– Sustained reforms could further boost growth, but risks exist, including uneven implementation and labor market weakness.

4. Core Inflation Contained:
– While headline inflation experienced volatility, core inflation decelerated, reaching 3.7% in December 2023.
– Forecasted easing of headline inflation towards 4.7% by end-2024 could lead to a policy rate cut by the Reserve Bank of India (RBI).

5. Improving Banking Sector:
– Sustained improvements in asset quality and profitability have strengthened the banking sector.
– Private-sector credit growth is expected to remain high, driven by the service sector and retail loans.

6. Deficit Target and Fiscal Challenges:
– Forecasted general government fiscal deficit is 8.6% of GDP in FY24, with challenges in managing subsidy and income support spending.
– The fiscal consolidation path beyond FY24 faces uncertainties, with trade-offs between economic growth and consolidation becoming more acute.

7. Stable, High Public Debt:
– Projected general government debt is 82.7% of GDP at FYE24, higher than the BBB median.
– Limited fiscal buffers amid high GDP growth narrow fiscal headroom for potential economic shocks.

8. Continuity Likely After Elections:
– Anticipated policy continuity after the general election in April-May 2024, with gradual fiscal consolidation and economic reform momentum.

9. Surging Portfolio Inflows:
– Expectation of rising foreign-exchange reserves due to large portfolio inflows, particularly in equity markets.
– FX reserves forecasted to reach USD 654 billion by end-2024.

10. ESG Considerations:
– India’s ESG Relevance Scores highlight political stability, rights, rule of law, institutional quality, and control of corruption as significant factors.
– Positive impacts on the credit profile are observed in governance indicators, while concerns arise in areas like human rights and political freedoms.

Rating Sensitivities:
Negative:
– Rising general government debt/GDP ratio.
– Structurally weaker real GDP growth outlook.

Positive:
– Implementation of a credible medium-term fiscal strategy.
– Higher medium-term investment and growth rates without macroeconomic imbalances.

Sovereign Rating Model (SRM) and Qualitative Overlay (QO):
– Fitch’s SRM assigns India a score equivalent to a rating of ‘BB+’ on the LT FC IDR scale.
– The qualitative overlay compensates for SRM output volatility attributed to the pandemic shock.

Country Ceiling:
– India’s Country Ceiling is ‘BBB-‘, aligning with the LT FC IDR.
– No material constraints or incentives against capital or exchange controls that would impede private sector transactions.

ESG Considerations:
– ESG Relevance Scores emphasize governance indicators and their impact on the credit profile.
– Scores for political stability, rule of law, and creditor rights have positive effects, while concerns exist in areas like human rights.

Read Fitch Full Report.