India’s sovereign-credit outlook was lowered to negative from stable by Fitch Ratings, which cited the heightened risk of a deterioration in growth potential and limited progress on paring the nation’s budget deficit.
Price pressures and weak public finances put “even greater onus on effective government policies and reforms that would ensure India can navigate the turbulent global economic and financial environment and underpin confidence in the long-run growth potential of the Indian economy,” Art Woo, a Hong Kong-based director of sovereign ratings at Fitch, said in a statement yesterday.
The rupee and bonds extended losses as Fitch joined Standard & Poor’s in signaling that the rating of Asia’s third-largest economy is at risk of demotion to so-called junk status. The Reserve Bank of India unexpectedly left interest rates unchanged yesterday as accelerating inflation curbs scope to bolster the weakest economic expansion in close to a decade.
“India’s economic fundamentals have worsened drastically and such developments are expected in a downtrend,” said Sujan Hajra, chief economist at Anand Rathi Financial Services Ltd. in Mumbai. Fitch’s move will impact investors’ perception of India and may “hurt inflows and raise the cost of foreign borrowings for Indian companies.”
Rupee, Bonds, Stocks
The rupee slid 0.8 percent to 55.92 per dollar in Mumbai yesterday. It has tumbled about 20 percent in the past year. The yield on the 8.15 percent bond due June 2022 rose 12 basis points, or 0.12 percentage point, to 8.17 percent. The BSE India Sensitive Index fell 1.4 percent.
Fitch affirmed its sovereign rating for India at BBB-, the lowest investment grade level. Standard & Poor’s warned on June 11 that it may cut India’s rating after lowering the outlook to negative in April.
India’s gross domestic product rose 5.3 percent in the three months through March from a year earlier, the least since 2003, imperiling Prime Minister Manmohan Singh’s goal of 9 percent annual gains to cut poverty. Inflation accelerated to 7.55 percent in May.
Fitch said the outlook revision reflects “heightened risks that India’s medium- to long-term growth potential will gradually deteriorate if further structural reforms are not hastened,” adding the government has made “limited progress” on reducing its fiscal deficit.
India’s budget shortfall was 5.76 percent of GDP in the 12 months ended March, wider than the 4.6 percent target set in 2011. The government aims to cut the deficit to 5.1 percent in the current fiscal year, in part by capping a subsidy program ranging from diesel to fertilizers.