Fitch Affirms India At BBB-; Expects Growth To Outperform Peers

Fitch Ratings affirmed India's long-term foreign-currency issuer default rating at BBB-, with a Stable outlook, and said its growth will likely outperform peers.

“India's rating is underpinned by a robust medium-term GDP (gross domestic product) growth outlook and sound external finances, which remain intact as the country has effectively navigated a fraught external environment in the past few years,” Fitch said in a statement.

India is poised to remain one of the fastest-growing countries globally in the next few years as the robust economic momentum is proving resilient, it added.

The rating agency projected GDP growth of 6.9% in the fiscal year ending March 2024 (FY24), well above its 6% FY24 forecast from the last review in May 2023, before easing to 6.5% in FY25.

Fitch said investment is likely to remain a key growth driver, as the government's capital expenditure drive is likely to continue and private investment should accelerate gradually. Consumption, however, is likely to moderate further in the near-term due to reduced household savings buffers, it noted.

The rating agency said sustained improvements in asset quality and profitability have strengthened bank balance sheets, which also supports the economic outlook.

INFLATION OUTLOOK

Fitch said the headline inflation was volatile in 2023 due to food price shocks, periodically exceeding the Reserve Bank of India's (RBI) 2%-6% target band.

However, core inflation decelerated, reaching 3.7% in December from around 6% at end-2022, and that should help anchor headline inflation, it added.

The rating agency expects headline inflation to ease towards 4.7% by end-2024 from 5.7% in December 2023. “Under this inflation outlook, we see the RBI cutting its policy rate by 75bp in FY25,” it said.

FISCAL DEFICIT

Fitch said the general government fiscal deficit will likely remain elevated, at 8.6% of GDP in FY24 (2023 BBB median: 3.5%) from 9.2% in FY23. It expects the central government to achieve its 5.9% of GDP FY24 deficit target from 6.4% in FY23.

The rating agency said subsidy and income support spending has risen beyond budget expectations, but it expects spending to be managed to meet the target, even in an election year.

ELECTION YEAR

India's general election is likely to be held in April-May 2024, Fitch said.

Polls indicate that the incumbent government led by the Bharatiya Janata Party (BJP) under Prime Minister Narendra Modi will be re-elected, even as much of the opposition has coalesced under a broad coalition, it added.

“As a result, we expect policy continuity, with gradual fiscal consolidation and economic reform momentum,” Fitch said.

PORTFOLIO INFLOWS

Fitch expects foreign-exchange (FX) reserves to continue rising due to large portfolio inflows, particularly into equity markets, and a narrower current account deficit, which is likely to be at 1.4% of GDP in FY24 and FY25.

The rating agency said FX reserves hit $623 billion (7.8 months’ external payments) by end-2023, up by nearly $40 billion since October.

Fitch said the RBI managed the exchange rate in a narrow range of 81-83 per USD in 2023, intervening to maintain stability and more recently to build reserves.

Further inflows should push FX reserves to $654 billion by end-2024, with Fitch expecting nearly $25 billion from India's inclusion in the JP Morgan Global Bond Index by March 2025, among other flows, it added.

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