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'Our rating is dependent on the medium-term outlook'

December 01, 2021 11:56 IST

'While we note the very strong cyclical recovery in the economy, we believe there is still uncertainty over medium-term prospects'

IMAGE: Union Finance Minister Nirmala Sitharaman at a review meeting on CAPEX for Power, Coal and Atomic Energy in New Delhi, November 1, 2021. Photograph: Press Information Bureau

Fitch Ratings Director Asia-Pacific Sovereigns Jeremy Zook tells Indivjal Dhasmana the agency's move to retain India's ratings at the lowest investment grade and the outlook negative is based on its medium-term debt trajectory and the potential of government policies to reduce it.


Don't you think Fitch is an outlier since it still has a negative outlook on India's ratings against 'stable' by S&P and Moody's?

Our Rating Action Commentary reflects Fitch Ratings' credit views; we do not comment on others' ratings.

India's high debt and huge fiscal deficit are due to exceptional conditions the pandemic has created. Don't you think this warrants an upgrade of at least the outlook?

It is true that we have seen a rise in deficits and debt globally owing to the pandemic.

Our ratings take into account peer medians as well as individual sovereigns' historical track record on fiscal consolidation.

We would note that India entered the pandemic from a position of relative fiscal weakness, and with the highest debt/GDP ratio among 'BBB' emerging market sovereigns, and had a limited fiscal space from a ratings perspective.

Our ratings assessment for India is focused on the medium-term debt trajectory and prospects of policies to put this ratio on a downward trend.

You said adequate recapitalisation could mitigate the risk aversion currently among banks. How much is the amount required for this purpose in the current financial year and the next one?

In our new base case scenario, we do not expect the banking system to require fresh equity capital to keep the system's common equity tier1 (CET1) ratio above the regulatory minimum of 8 per cent until FY25.

Under the stress case scenario, fresh capital of $27 billion would be required.

Our base case factors in a gradual reduction in the severity of economic disruption associated with the pandemic, and fiscal measures to drive growth ahead of the 2024 general election.

The stress scenario factors in such an outcome, which would dent economic activity and result in higher pressure on asset quality.

We expect system credit growth to average 2.7 per cent during FY22-FY25 under the stress case, compared with 6.7 per cent under our base case.

Why do you see implementation risks associated with various reform measures announced by India such as production-linked investment (PLI) schemes, labour reforms, creating a bad bank, and infrastructure programmes?

Reform implementation poses a challenge for many sovereigns, as we have seen in India's case with the agricultural reforms.

However, we view reform prospects positively in India, particularly around the PLI scheme and labour reforms.

Your assessment said mobility indicators had returned to pre-pandemic levels and high-frequency indicators pointed to strength in the manufacturing sector. Does it give any rationale to the negative outlook?

Our ratings are dependent on the medium-term outlook.

While we note the strong cyclical recovery in the economy, we believe there is still uncertainty over medium-term prospects, though we do note these uncertainties are narrowing.

You estimated economic growth at 8.7 per cent this fiscal year and 10 per cent for the next one. Most analysts have estimated higher economic growth for FY22 than FY23. Why do you think otherwise?

Solid sequential momentum through FY23, as a result of the sustained vaccination drive and recovery in consumption, underpins our current growth outlook.

We do note there is an upside to our FY22 growth forecast, which would lead to lower growth next year as a result of base effects.

You said there were risks of higher inflation, given persistent core inflation, increasing energy prices, and rising inflation expectations. Don't you think the recent move by the government to cut petrol and diesel excise duties will ease the inflation rate?

The cut in excise duties can help to contain inflation; however, we view the persistent level of core inflation and energy price developments, along with global price pressures, as carrying upside risks for our inflation outlook.

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Indivjal Dhasmana
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