Fitch Revises India's Local Currency Outlook To Stable; Affirms at 'BBB-'


June 14, 2010: Fitch Ratings has today revised the Outlook on India's Long-term local currency Issuer Default Rating (IDR) to Stable from Negative. At the same time, the agency affirmed India's Long-term foreign and local currency IDRs at 'BBB-'. The Outlook on the foreign currency IDR remains at Stable. Fitch has also affirmed the Short-term foreign currency IDR at 'F3' and the Country Ceiling at 'BBB-'.

"India's strong growth prospects and the one-off positive impact from the telecoms auctions underpin Fitch's forecast that government debt to GDP ratio will decline, easing the near-term pressure on India's local currency ratings. However, public finances remain a clear weakness, and downward pressure on the ratings could resume if India veers too far off the deficit reduction path as outlined by the Thirteenth Finance Commission," said Andrew Colquhoun, Director in Fitch's Asia-Pacific Sovereigns Group.



Fitch projects general government debt to fall to 80% of GDP by end-March 2011 (end-FY11) from 83% at end-FY10, reflecting the impact of strong GDP growth on the denominator and the one-off revenues from the 3G licence and broadband spectrum auctions. The agency has revised India's FY11 growth forecast up to 8.5% from 7% on signs of strong growth momentum, including industrial production growth of 17.6% in April 2010, year-on-year. The telecom licence auctions together netted the government INR1,060bn, representing about 1.6% of projected FY11 GDP, as against the INR350bn budgeted originally (Fitch's February review of India took the cautious approach of assuming zero auction revenues). The agency anticipates some pressure on the government to spend some of the revenue windfall and estimates an additional 0.3pp spending in FY11, still delivering a net 1.3pp fiscal saving.

However, fiscal management remains relatively weak. Fitch anticipates that the central government's deficit on the government basis (including privatisation and auction receipts as revenue and excluding some off-budget items) to be at 5.7% of GDP in FY11, just 1pp down from FY10, despite the 1.6% of GDP reaped from the telecom auction. The report of the Thirteenth Finance Commission (TFC) in February laid out a path of deficit reduction towards a "golden rule" of borrowing only to finance investment by FY15. India's track record on sticking with medium-term fiscal plans is not good, although the Congress-led government has at least voiced its commitment to debt reduction. If the authorities stray too far from the TFC's consolidation path and debt ratios resume rising, it could impact the ratings negatively.



A significant drop in the country's growth momentum to below Fitch's projections would worsen India's debt dynamics and put downward pressure on its ratings. However, India's credit profile continues to benefit from the largely local-currency profile of its debt (95% of the stock), and from the sovereign's stable access to domestic-currency financing, mainly from the banking system. Signs that India's banking system was under stress would likely be negative for the sovereign ratings, although this is not the agency's base case. Inflation remains uncomfortably high, with wholesale prices up 10.2% in the year to May, prompting the central bank to hike rates twice in response so far in 2010. An intensified inflation shock that is severe enough to disrupt macroeconomic and/or financial stability would be negative for India's ratings.

India's strong external finances, including its sovereign and overall net creditor status and official reserves of USD271bn by June 4 2010 (up 3.6% on a year earlier), continue to support its foreign currency ratings. By contrast, poor physical infrastructure, underdevelopment reflected in low average incomes, and weak governance indicators relative to rated peers constrains the ratings.

(Press release of Fitch Ratings)

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