Fitch Revises India Rating Outlook to Stable in Boost for Singh

India’s credit-rating outlook was revised to stable from negative by Fitch Ratings, following a nine-month policy push by the government to pare the nation’s budget deficit and revive economic growth.

The long-term foreign and local currency ratings were affirmed at BBB-, the lowest investment grade, Fitch said in a statement yesterday, leaving the nation on par with Indonesia and the Philippines. The company cut India’s outlook in June 2012.

The revision “reflects the measures taken by the government to contain the budget deficit” and “some, albeit limited, progress in addressing some of the structural impediments to investment and economic growth,” Fitch said.

The move may provide some succor for Prime Minister Manmohan Singh’s coalition, which has been hurt by graft scandals that in recent weeks disrupted parliament and hampered efforts to extend policy changes. The rupee added to gains following the outlook revision, after sliding to a record low this week, weighed down by India’s current-account deficit.

“In the sea of negative news, this is a small positive,” said Shubhada Rao, chief economist at Yes Bank Ltd. in Mumbai. “It will have a marginal improvement on sentiment, but it’s a long haul to get the economy back on a strong footing.”

The rupee climbed 1 percent to 57.79 per dollar at the close in Mumbai yesterday. It slid to an all-time low of 58.9850 on June 11 and is down 4.8 percent this year. The S&P BSE India Sensex index ended 0.5 percent lower yesterday, before the Fitch statement. The yield on the 7.16 percent bond maturing in May 2023 fell to 7.29 percent from 7.30 percent on June 11.

Singh’s Changes

Singh began reforms in September to counter the weakest economic growth in a decade, woo investment and avert a rating downgrade. Steps have included liberalization in the retail and aviation industries to attract overseas capital, and a push to speed up infrastructure projects.

The minority administration, whose economic credentials will be tested in elections due by May 2014, has also reduced levies on overseas buyers of local bonds and raised taxes on gold imports to pare a record current-account shortfall.

Still, Fitch said “the investment climate could benefit from further reforms.”

The recent legislative logjam has stalled bills to simplify taxes, provide more land for industry and open up the pensions and insurance business to foreign companies.

Fiscal Deficit

Standard & Poor’s lowered India’s outlook to negative last year, while Moody’s Investors Service kept it at stable. Both companies classify India at the lowest investment grade.

India will “broadly meet” the budget deficit target of 4.8 percent of gross domestic product in the year ending March 2014, Fitch said. The shortfall was 4.9 percent of GDP in 2012-2013.

Finance Minister Palaniappan Chidambaram’s goal is 3 percent by 2017, as he strives to contain price pressures and boost scope for interest-rate cuts by the Reserve Bank of India.

The recent drop in the rupee may “limit the scope for further cuts in RBI policy rates,” Fitch said.

Reports yesterday showed India’s industrial-output growth slowed in April, while consumer prices rose 9.31 percent in May from a year earlier.

Reserve Bank Governor Duvvuri Subbarao will keep the benchmark interest rate at 7.25 percent next week, 11 of 19 analysts said in a Bloomberg survey. The rest called for a cut to 7 percent. Subbarao reduced borrowing costs 25 basis points in January, March and May each.

The current-account deficit was $32.6 billion in the last quarter of 2012, or 6.7 percent of gross domestic product.

Still, India’s overall external position is a “relative rating strength” as foreign debt is “moderate,” Fitch said, adding currency reserves “provide a cushion” against shocks.

India’s GDP climbed 5 percent in the year ended March, the least since 2003. “Structural” budget deficits, “high” public debt and the challenge from “large segments of the population engaged in low-valued added activities,” constrain its rating, Fitch said.

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