Fitch Affirms India at 'BBB-'; Outlook Stable

Fitch Ratings has affirmed India's Long-Term Foreign- and Local-Currency Issuer Default Ratings at 'BBB-'.

The issue ratings on India's senior unsecured foreign- and local-currency bonds are also affirmed at 'BBB-'.

Key rating drivers

Fitch's affirmation of India's sovereign ratings and Stable Outlook balances a strong medium-term GDP growth outlook and favourable external finances, including a strong foreign reserves buffer, with a high government debt burden and weak structural features, including a difficult - but improving - business environment, the Fitch said.

"India's positive GDP growth outlook stands out globally. Fitch forecasts India's real GDP growth to accelerate to 7.5% in the fiscal year ending 31 March 2016 (FY16) and 8.0% in FY17, from 7.3% in FY15, supported by the government's beefed-up capex spending and gradual implementation of a broad-based structural reform agenda"

The Reserve Bank of India's (RBI) policy rate cuts of 125bp in total in 2015 are also likely to contribute to higher GDP growth, even though monetary transmission is impaired by relatively weak banking sector balance sheets.

India's real GDP growth averaged 6.7% over the past five years, which is considerably higher than the 'BBB' range median of 3.0%, and it remains so even if the uplift in growth resulting from the GDP data revision by the Central Statistical Office in February 2015 is discounted.

The government continues to steadily roll out its ambitious structural reform agenda, as illustrated in recent months by the announcement of new reforms that will likely improve the business environment, including changes in the foreign direct investment (FDI) regime.

"It has so far turned out difficult for the government to garner the required support in the Upper House (Rajya Sabha) for some big ticket reforms, including a national Goods and Services Tax, but those reforms that only require executive approval continue to be implemented and legislative reforms can still be pursued at the state level", Fitch said.

India moved up four places in the World Bank's Ease of Doing Business rankings in 2015, but is still the worst-performing of all 'BBB' range sovereigns at 130th out of 189 countries.

India's sovereign ratings continue to be constrained by limited improvement in its fiscal position. The seventh Pay Commission's recommendation of a 23.6% increase in remuneration for central government employees raises doubts about the feasibility of the medium-term consolidation path without any new revenue-generating measures.

Fitch expects a general government fiscal deficit, including both the central government and the states, of 6.7% in FY16, more than double the 'BBB' peer median of 2.8%. Fitch expects the general government debt burden to rise to 68.8% of GDP in FY16 from 66.8% in FY15, one of the highest of 'BBB' range sovereigns and far off the 'BBB' category median of 42.8% of GDP.

Inflation

Fitch said that the inflation in India averaged 7.9% over the past five years, comparing unfavourably with the 'BBB' peer median of 3.3%.The RBI's monetary policy track record is reinforced by inflation turning out broadly in line with its targeted glide path. The government's decision to limit minimum support price rises for agricultural products helped to keep inflation under control.

India is not immune to external shocks, but seems less vulnerable than many of its peers. External vulnerabilities have reduced substantially in the past two years, particularly its narrowed current-account deficit, which Fitch expects to reach 1.1% in FY16 compared with the 'BBB' median of 5.6%, and a build-up of reserves to 7.7 months of current external payments.

The Indian economy is less developed on a number of metrics than its peers. Its ranking on the United Nations Human Development Index indicates relatively low basic human development, while average per capita income remaining low at USD1,669 in 2015 compared with the 'BBB' range median of USD9,145, Fitch said in the press release.

Public sector banks form a contingent liability for the government's finances in the years ahead.

The banking sector's non-performing loans, which Fitch expects to reach 4.9% of total assets in FY16, are likely to hamper banks' ability to internally generate capital at a time when they will require capital to transition towards Basel III by FY19.

It remains to be seen if the government's planned capital infusion of INR700bn into the public sector banks will be adequate in light of supervisory norms and weak equity valuations, Fitch added.

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