Global credit rating agency Fitch has affirmed India’s long-term foreign-currency Issuer Default Rating (IDR) at 'BBB-' with a ‘Stable’ outlook as its feels India's GDP growth is still solid against that of peers.
The rating agency expects India’s growth to slow to 4.6 percent in the financial year ending March 2020, from 6.8 percent in FY19, which is still higher than the 'BBB' median of 2.8 percent.
“We expect growth to gradually recover to 5.6 percent in FY21 and 6.5 percent in FY22 with support from easing monetary and fiscal policy and structural measures that may also support growth over the medium term,” Fitch said in a note.
The affirmation of the ratings incorporates Fitch’s expectation of moderate fiscal slippage relative to the central government's deficit target of 3.3 percent of GDP in FY20.
“India's rating balances a still strong medium-term growth outlook compared with 'BBB' category peers and relative external resilience stemming from solid foreign-reserve buffers against high public debt, a weak financial sector and some lagging structural factors, including governance indicators and GDP per capita,” Fitch added.
The rating agency believes that there is a risk of more significant fiscal loosening in the event of continued weak GDP growth, for example, in the context of lingering problems in the NBFC sector.
Further, Fitch expects a general government debt level of 70.4 percent of GDP in FY20 and a general government deficit of 7.5 percent of GDP.
“We consider it highly unlikely that the government will comply with the general government debt ceiling of 60 percent of GDP by March 2025, as stipulated in the Fiscal Responsibility and Budget Management (FRBM) Act,” it sid.
Fitch also expects the Reserve Bank of India (RBI) to cut its policy rate by another 65 bps in 2020, after a cumulative 135 bps easing since February 2019.
The agency expects the positive impact of various government reforms on growth to materialize in the medium term, rather than the near term, and will depend on the details and implementation.
However, for NBFCs, Fitch believes that the measures have not fully arrested liquidity pressure, but funding costs seem to have come off their peak.
“A shake-out and return of confidence in the sector will take time and may involve the failure of some weak NBFCs,” Fitch added.
Indian banks generally have thin buffers to deal with continued systemic stress in the NBFC sector, to which their exposure reached 7.4 percent in FY19.
“We estimate that banks are already $7 billion short of the capital required to meet a 10 percent weighted-average common equity Tier 1 ratio by FY21 - the level that we believe would give the banks an adequate buffer above regulatory minimums. The banking sector's non-performing loan ratio fell to 9.3 percent in FY19, from 11.6 percent in FY18, but non-performing loans could build up again in the current weak economic environment,” it added.
First Published: IST