Fitch Affirms India’s Long-term foreign currency and local currency ratings at ‘BBB-’ Ratings

February 09, 2009: Fitch Ratings has today affirmed the Republic of India’s Long-term foreign currency and local currency Issuer Default Ratings (IDRs) at ‘BBB-’ (BBB minus). The Outlook on the foreign currency IDR remains Stable, and the Outlook on the local currency IDR remains Negative. At the same time, the agency has affirmed India’s Short-term foreign currency IDR at ‘F3’ and Country Ceiling at ‘BBB- ’ (BBB minus).

“The retention of the Negative Outlook on India’s local currency IDR is based on Fitch’s view that fiscal conditions are likely to continue to deteriorate as the economy weakens and as the central government responds with both tax and expenditure measures,” says James McCormack, Head of Asia Sovereign ratings. The agency forecasts the consolidated general government deficit will reach 9.5% of GDP in FY09, up from 6.1% in FY08 (including oil and fertilizer bonds, which are “off balance sheet” or “below the line” items), resulting in a slight increase in government debt, to 77.9% of GDP. India’s high fiscal deficit and government debt ratio are outliers among ‘BBB’ rated Sovereigns.

The agency indicates that future rating assessments would consider the FY10 budget and the recommendations of the Thirteenth Finance Commission. “It is essential that a credible medium-term fiscal strategy is enacted to resume the trend improvement in public finances that was evident from FY04 to FY08,” adds Mr. McCormack. Fitch notes that a failure to do so could undermine India’s economic growth prospects and put at risk its ability to continue to attract international capital inflows, which have had an important role in financing India’s development.

Despite the growing fiscal imbalance, Fitch indicates that India’s external creditworthiness remains strong, supporting the Stable Outlook on the foreign currency IDR. India faces a modest external financing requirement relative to its rating peer group, and the sovereign has ample external liquidity. The agency forecasts the current account deficit will fall to 1.2% of GDP in FY10 from 2.9% of GDP in FY09. The growth rates of services exports and remittance inflows are expected to decline with the advanced economies in recession, but Fitch believes the effects of lower oil prices and a reduction in the growth rate of non-oil imports will be even greater. At end-FY09, Fitch projects short-term debt on a residual maturity basis (including amortisation payments on medium-term debt obligations) will be USD60bn, well below official foreign exchange reserves (excluding gold) of USD241bn.

Economic growth has been slowing in India since September 2007, and recent data on industrial production and motor vehicle sales imply the decline in activity is becoming more pronounced. Fitch forecasts GDP growth of 5% in FY10, which would be the lowest annual growth rate since FY03. Fiscal stimulus and monetary easing are expected to only partially offset the slowdown in growth, as Fitch does not believe policy can reverse the immediate course of the economy. In fact, the agency suggests the magnitude of the fiscal deficit and the accompanying borrowing requirement may affect the availability and/or cost of domestic credit for the private sector, underscoring the need to ensure the current fiscal imbalance is corrected.

As the economic downturn has taken hold, Indian banks have already experienced a decline in asset quality, particularly with respect to unsecured consumer loans, and Fitch expects further deteriorations in sectors such as commercial real estate, textiles production and other export-oriented industries. According to Fitch, the gross NPL ratio of the banking system, which was 2.3% in December 2008, is not expected to significantly exceed 5% over the next 12 months, even adjusting for problem loans that are restructured during this period.

(This is press release of Fitch Ratings)

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