Fitch downgrades India's credit rating

July 15, 2008 -- Fitch has revised India’s long term currency issuer default rating (IDR) outlook to negative from stable. The agency, however, has affirmed India's long term foreign currency Issuer Default Rating (IDR) at 'BBB-' with stable outlook, its short-term foreign currency IDR at F3 and country ceiling at 'BBB-'. The negative outlook means that agency has put India on watch and if condition does not improve in 12 to 18 months, its rating could be downgraded

The revision in ratings outlook comes almost two years after the agency upgraded India’s local currency rating to investment grade with a stable outlook in August 2006. Standard & Poor’s revised its ratings outlook later in January 2007 to investment grade, Moody’s had done it earlier in 2004.

“The revision to the local currency outlook is based on a considerable deterioration of the central government’s fiscal position in FY09 (April 08-March ’09), combined with a notable increase in government debt issuance to finance subsidies not captured in the budget,” said James McCormack, head of Asia sovereign ratings, Fitch.

Fitch forecasts the central government deficit may increase from 2.8% of GDP in FY08 to 4.5% of GDP in FY09, based in part on higher on-budget subsidies, interest payments and increased wages for government employees.

The agency expects fiscal deficit on account of bond issuances to oil and fertiliser companies to account for least 2% of GDP this year, indicating an implicit deficit of 6.5% of GDP, if not more.

“Future ratings actions will depend largely on whether the fiscal slippage is reversed in FY09,” said Mr McCormack. Higher oil prices have raised India’s oil import bill dramatically over the past three years, and the merchandise trade deficit was the equivalent to 7.7% of GDP in FY08.

The current account deficit was however much lower at 1.5% of GDP, as services exports and remittance inflows remained robust. Fitch expects the trade deficit to widen to 8.2% of GDP in FY09, but the current account deficit may not widen further.



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