Fitch Ratings Revises India’s Outlook to ‘Negative’ From ‘Stable’

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Fitch Ratings on Thursday, 18 June, revised India's outlook to 'negative' from 'stable' and kept its sovereign rating at the lowest investment grade of ‘BBB-’.

“The coronavirus pandemic has significantly weakened India's growth outlook for this year and exposed the challenges associated with a high public-debt burden. Fitch expects economic activity to contract by 5% in the fiscal year ending March 2021 (FY21) from the strict lockdown measures imposed since 25 March 2020, before rebounding by 9.5% in FY22,” Fitch Ratings said.

It also noted that the forecast was subject to risks depending on the rising number of coronavirus cases in the country.

“The humanitarian and health needs have been pressing, but the government has shown expenditure restraint so far, due to the already high public-debt burden going into the crisis, with additional relief spending representing only about 1% of GDP by our estimates. Most elements of an announced package totalling 10% of GDP are non-fiscal in nature,” Fitch Ratings said.

Fitch Ratings noted that India’s fiscal metrics have deteriorated significantly, notwithstanding the government's expenditure restraint, due to the impact of the severe growth slowdown on revenue.

“Fitch expects general government debt to jump to 84.5% of GDP in FY21 from an estimated 71.0% of GDP in FY20. This is significantly higher than the median of 42.2% of GDP for the 'BBB' category in 2019, to which FY20 corresponds, and 52.6% for 2020.”

A statement from the rating agency said that liquidity issues in non-banking financial companies (NBFC) and asset-quality challenges in banks could negatively affect India’s medium-term GDP growth outlook.

“A renewed rise in non-performing loans and the need for further financial government support now seem inevitable despite regulatory measures announced by the Reserve Bank of India (RBI). These measures include an extension of the 90-day moratorium on recognition of impaired loans to 180 days and several relaxations in bank lending limits such as allowing banks to fund interest on working-capital loans. These moves will put a heavy onus particularly on public-sector banks to bail out the affected sectors and extend impaired-loan recognition, heightening solvency risks if not met by adequate and timely capital support. ”