Fitch retains India ratings, currency outlook still negative

Fitch retains India ratings, currency outlook still negative
Financial Express, February 2, 2010, Page 13

fe Bureaus, Mumbai

Global rating agency Fitch on Monday cautioned the government against the increasing fiscal deficit, even as it retained the current rating of the country at investment grade, which means the chances of sovereign default are comparatively low.

Fitch Ratings has retained the country’s rating at BBB-, which is an investment grade and three notches down from the highest grade. Fitch said India requires to consolidate its place in the ‘BBB’ range. The outlook on the long-term foreign currency IDR is stable, while that on the long-term local currency IDR is negative. The short-term foreign currency IDR is affirmed at ‘F3’ and the country ceiling at ‘BBB-’, says a study by Fitch, which was released on Monday.

The report adds that FY11 budget and the report of the thirteenth finance commission (13FC), both expected by end of February, would be important fiscal-policy statements. The Finance Commission was mandated to consider fundamental revenue-side reforms including introduction of a goods and services tax, and to recommend a new deficit-reduction framework. Fitch believes that India requires substantive fiscal reforms to address or offset the weaknesses exposed in FY09-FY10.

Commenting on the report, Andrew Colquhoun, director in Fitch’s Asia-Pacific Sovereign Group Fitch, said, “Fitch regards the deterioration in India’s public finances since 2008 as partly structural, putting negative pressure on the local currency rating that will require substantive fiscal reform to redress". However, talking about foreign currency ratings, Colquhoun added that it remain well supported by foreign investment prospects and by the world’s sixth-biggest stockpile of foreign reserves.

Country’s budget deficit rose in April-March 2009 to 11.6% of GDP, from 6.4% a year earlier, as revenues were eroded by tax cuts made as a stimulus measure. Fitch projects only a small reduction in the deficit to 10.7% of GDP for FY10, which takes the general government debt stock to a projected 83% of GDP by the end of FY10, undoing the results of the fiscal consolidation achieved since FY04. The government’s abandonment of the fiscal targets laid out in the Fiscal Responsibility and Budget Management Act of 2003 leaves India without a credible fiscal framework to constrain policy and reduce its debt ratios, says the report.

India's strong external finances, including its sovereign and overall net creditor status and the world's sixth-biggest stockpile of official reserves by end-2009 ($ 283bn, up 11% on a year earlier), continue to support the foreign currency ratings.