New Delhi: Bringing cheer to the government struggling to arrest rupee's slide, global rating agency Fitch on Wednesday revised India's sovereign credit outlook to stable from negative. Taking note of the government's efforts to contain fiscal deficit, Fitch Ratings revised India's Outlook to Stable from Negative and affirmed 'BBB-' rating.
"The revision of the Outlook to Stable reflects the measures taken by the government to contain the budget deficit, including the commitments made in the FY'14 budget, as well as some, albeit limited, progress in addressing some of the structural impediments to investment and economic growth," the agency said in a statement.
Fitch further said it expects the economy to recover after real GDP grew just 5 percent in 2012-13 versus 6.2 percent in the year ago period. India's economic recovery, however, is likely to remain slow until a healthier investment climate is created, which helps lift potential growth again, it said.
"As a result, Fitch is forecasting only a modest recovery with real GDP expected to expand 5.7 percent and 6.5 percent in FY14 and FY15 respectively," Fitch said. Fitch along with Standard and Poor's had earlier threatened to downgrade India's rating to junk grade in
absence of steps by government to contain deficits and promote investment.
Rupee yesterday touched historic low of 58.96 against the dollar. However, it recovered by 19 paise to 58.20 against the dollar in early trade on Wednesday after RBI announced steps to check free-fall in rupee, raising the limit for online repatriation of export proceeds by over three-fold to USD 10,000.
A concerned government has given indications to investors that it would take more steps to increase foreign investments in the country to stabilize rupee. Fitch also affirmed its Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BBB-'.
"The agency has also affirmed the Country Ceiling at 'BBB-' and the Short-Term Foreign-Currency IDR at 'F3'," it said. It said the outlook revision and the affirmation of India's investment-grade ratings reflect that the authorities were successful in containing the upward pressure on the central government's budget deficit in the face of a weaker-than-expected economy.
The fiscal deficit was 4.9 percent of GDP in 2012-13, compared with 5.7 percent in the previous year. "The authorities have also begun to address structural factors that have weakened the investment climate and growth prospects, notably regulatory uncertainty, delays in government approvals of investment projects and supply bottlenecks, for example, in the power and mining sectors," it said.
The establishment of a Cabinet Committee on Investment should help to fast-track infrastructure-related projects and the government has made it easier for FDI to access a range of industries.
"Nonetheless, the investment climate could benefit from further reforms, such as the new land acquisition bill, some liberalization of insurance and pension provision and public procurement, which are pending parliamentary approval," Fitch said.
It said addressing the structural issues in the power and mining sectors would further boost investor confidence.    Referring to inflation, Fitch said the pressures have begun to show more pronounced signs of easing in response to weaker economic conditions and the tightening of monetary conditions by the RBI.
"The recent weakness of the exchange rate may, however, complicate policy management and limit the scope for further cuts in RBI policy rates," it added. Fitch further said despite deterioration in the current account deficit, in part due to an increase in gold imports, it considers India's overall external position to be a "relative rating strength".
Foreign debt is moderate and RBI's international reserves, which stood at USD 288 billion at the end of May, provide a cushion to absorb adverse external shocks. It also said the profitability and capital position of the banking sector will remain under pressure as asset quality continues to gradually deteriorate.
"Nonetheless, Fitch does not view the banking sector as a material risk to macro-financial stability nor to public finances in terms of the crystallization of large contingent liabilities," the global rating agency added.
India's investment-grade ratings, Fitch said, are also underpinned by high domestic savings rates that limit the reliance on foreign savings for private investment and fiscal funding, as well as by a relative long maturity of government debt issued in its own currency.
While Fitch has revised down its assumption regarding potential growth to 6-7 percent from 8-9 percent, India remains one of the most dynamic and diversified economies in the world, the agency added.
It further said: "India's sovereign ratings remain constrained by persistent structural budget deficits and high public debt as well as by the challenges associated with large segments of the population engaged in low-valued added activities."


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