Fitch Affirms India’s Sovereign Rating On Robust Growth Outlook, Flags Weak Finances

Fitch Ratings, a global credit rating agency, affirmed India’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BBB-‘ with a stable outlook on Tuesday. The agency cited India’s robust growth potential and resilient external finances as key supporting factors for the sovereign rating. Fitch expects India to be one of the fastest-growing sovereigns globally, with 6% growth in the current fiscal year (April 2023-March 2024), supported by resilient investment prospects.

Weak public finances remain a challenge

Despite India’s strengths in growth and external finances, Fitch warned that weak public finances remain a challenge for the country. India’s rating has been unchanged at ‘BBB-‘, the lowest investment grade, since August 2006. The agency cited high deficits and debt relative to peers, as well as lagging structural indicators, including World Bank governance indicators and GDP per capita, as examples of weak public finances.

All three global rating agencies have a low investment grade rating on India

Fitch, S&P, and Moody’s, the three global rating agencies, all have a low investment grade rating on India with a stable outlook. These ratings are viewed by investors as a barometer of a country’s credit worthiness and impact borrowing costs.

Risks and headwinds for India

Fitch warned that India will face headwinds from elevated inflation, high interest rates, subdued global demand, and fading pandemic-induced pent-up demand. The agency noted that risks remain given low labour force participation rates and an uneven reform implementation record.

Private sector poised for stronger investment growth

Despite these risks, Fitch said growth prospects have brightened as the private sector appears poised for stronger investment growth following the improvement of corporate and bank balance sheets in the past few years, supported by the government’s infrastructure drive.

India’s large domestic market an attractive destination for foreign firms

India’s large domestic market makes it an attractive destination for foreign firms. However, it is unclear whether India will be able to realize sufficient reforms to allow the economy to benefit substantially from opportunities offered by deeper integration in global manufacturing supply chains, including China+1 corporate strategies that encourage diversification in investment destinations.

Service sector exports a bright spot

Fitch said service sector exports are likely to remain a bright spot, and banks appear well-positioned to support sustained credit growth if capitalization is well-managed. The agency estimates inflation to remain near the upper-end of the Reserve Bank’s 2%-6% target band.

Domestic equity market benchmarks extend winning streak

On the domestic equity market front, benchmark indices extended their winning streak on Tuesday morning. The 30-share BSE Sensex climbed 226.54 points to 61,990.79 in early trade, while the NSE Nifty advanced 68.90 points to 18,333.

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