Global rating agency Fitch has affirmed India’s sovereign rating at ‘BBB-’ (Triple B Minus) with a Stable Outlook. This is the last investment grade rating. Various other agencies have also assigned similar ratings. A sovereign rating helps the foreign investor take a call to put money in a particular country.
“India’s rating reflects strengths from a robust growth outlook compared with peers and resilient external finances, which have supported India in navigating the large external shocks over the past year,” the agency said in rating commentary. However, it cautioned that these strengths are offset by India’s weak public finances, illustrated by high deficits and debt relative to peers, as well as lagging structural indicators, including World Bank governance indicators and GDP per capita.
While IMF estimates India to grow at 5.9 per cent in Fiscal Year 2023-24 (FY24), the World Bank projection is 6.3 per cent. At the same time, RBI says India is expected to grow at 6.5 per cent. IMF and World Bank cut the forecast, but RBI revised it upward.
Fitch forecasts India to be one of the fastest-growing sovereigns globally at 6 per cent in the fiscal year ending March 2024 (FY24), supported by resilient investment prospects. Still, “headwinds from elevated inflation, high interest rates and subdued global demand, along with fading pandemic-induced pent-up demand, will slow growth from our FY23 estimate of 7 per cent before rebounding to 6.7 per cent by FY25,” it said.
Regarding the medium term, Fitch says strong growth potential is a key supporting factor for the sovereign rating. 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. Still, “risks remain given low labour force participation rates and an uneven reform implementation record,” it cautioned.
The agency, though, noted that India’s large domestic market makes it an attractive destination for foreign firms. However, “it is unclear whether India will be able to realise sufficient reforms to allow the economy to benefit substantially from opportunities offered by the deeper integration in global manufacturing supply chains, including China+1 corporate strategies that encourage diversification in investment destinations,” it said, Further, it added that service sector exports, however, are likely to remain a bright spot.
Fitch highlighted that sustained improvements in asset quality and profitability have strengthened bank balance sheets on the back of the economic recovery. This has created headroom to absorb risks as pandemic-related forbearance measures continue to unwind in FY24. “Banks appear well-positioned to support sustained credit growth if capitalisation is well-managed,” it said.
Talking about inflation, the agency forecasted headline inflation to decline but remained near the upper end of the Reserve Bank of India’s 2-6 per cent target band, averaging 5.8 per cent in FY24 from 6.7 per cent last year. Core inflation pressure appears to be abating, falling to 5.7 per cent in March, its lowest since July 2021.