Rating agency Fitch Ratings on Thursday revised outlook on on India's long-term foreign-currency to 'negative' from 'stable' but affirmed issuer default rating (IDRNSE 0.28 %) at BBB-, the lowest investment grade.
The move came after another rating firm Moody’s -- earlier this month -- downgraded India’s sovereign rating by a notch to ‘Baa3’ from ‘Baa2’ for the first time in 22 years, while keeping its outlook ‘negative’.
In a note, Fitch argued that the coronavirus pandemic has significantly weakened India's growth outlook for this year and exposed the challenges associated with high public-debt burden.
The rating agency expects economic activity to contract by 5 per cent in the fiscal year ending March 2021 (FY21) from the strict lockdown measures imposed since 25 March 2020, before rebounding by 9.5 per cent in FY22.
The rebound will mainly be driven by a low-base effect, it said.
"Our forecasts are subject to considerable risks due to the continued acceleration in the number of new Covid-19 cases as the lockdown is eased gradually. It remains to be seen whether India can return to sustained growth rates of 6 per cent to 7 per cent as we previously estimated, depending on the lasting impact of the pandemic, particularly in the financial sector," it said.
On India's IDR rating, Fitch said the relatively closed nature of India's capital markets, with limited foreign portfolio inflows, supports the authorities' ability to finance wider fiscal deficits domestically.
"Only around 4 per cent of government securities are held by non-residents and the external liabilities account for just 6 per cent of central government debt. The RBI has also built up its foreign-exchange reserve buffers in recent months to $502 billion by 5 June 2020, covering around nine months of current account payments, higher than the 'BBB' median of five months," it said.
The government intends to open up more to foreign capital in the next few years as a source of deficit financing, but foreign investors' tolerance for government debt at current levels, with a significantly larger portion of external debt, remains to be tested, Fitch said.
Source:- economictimes.indiatimes.com