Fitch Ratings revises India's outlook to negative from stable; retains sovereign rating 'BBB-'

Fitch Ratings revised the rating outlook for India to negative from stable on Thursday. It retained its sovereign rating at the lowest investment grade of 'BBB-'. "Fitch Ratings has revised the outlook on India's long-term foreign-currency issuer default rating (IDR) to negative from stable and affirmed the rating at 'BBB-'," it said. Fitch cited increasing risk to the country's growth and debt outlook.

"The coronavirus pandemic has significantly weakened India's growth outlook for this year and exposed the challenges associated with a high public-debt burden. Fitch expects economic activity to contract by 5% in the fiscal year ending March 2021 (FY21) from the strict lockdown measures imposed since 25 March 2020, before rebounding by 9.5% in FY22," it stated.

The downgrade comes after rating agency Moody's earlier this month downgraded India's sovereign rating to lowest investment grade of BAA3 for the first time in 22 years.

Also read: Moody's cuts India's sovereign rating to Baa3, maintains negative outlook

Fitch added that the forecasts are subject to considerable risks due to the continued acceleration in the number of new coronavirus cases. "It remains to be seen whether India can return to sustained growth rates of 6% to 7% as we previously estimated, depending on the lasting impact of the pandemic, particularly in the financial sector," it said.

The ratings agency said that the humanitarian and health needs have been pressing but the government has shown restraint when it comes to expenditure. "Fiscal metrics have deteriorated significantly, notwithstanding the government's expenditure restraint, due to the impact of the severe growth slowdown on revenue, the fiscal deficit and public-sector debt ratios. Fitch expects general government debt to jump to 84.5% of GDP in FY21 from an estimated 71.0% of GDP in FY20. This is significantly higher than the median of 42.2% of GDP for the 'BBB' category in 2019, to which FY20 corresponds, and 52.6% for 2020," it further stated.

Also read: Moody's says India's retail, SME loan quality may deteriorate as well

It further said that the medium-term GDP growth outlook may be negatively affected by new asset-quality challenges in banks as well as liquidity issues in NBGCs. "The financial sector was already facing weak business and consumer confidence before the crisis and authorities had to deal with some high-profile cases over lapses in governance. Nonetheless, the banking sector's non-performing loan (NPL) ratio likely improved to 9.0% in FY20 from 11.6% two year earlier, according to our estimate, due to government capital injections," said the ratings agency.

Fitch said that increase in NPLs and the need for further fiscal support seems to be inevitable despite the regulatory measures announced by RBI.

Also read: Coronavirus effect: Moody's takes ratings action on 11 banks; downgrades SBI, HDFC, IndusInd, EXIM Bank