Will India's improved Fitch rating influence investors?

Fitch Ratings has raised India's sovereign outlook from "negative" to "stable". The global rating agency has done so based on the government's stated expectation that the fiscal deficit will be contained within the FY 2013/14 target of 4.8 per cent of the GDP.
 
The upgrade comes at a time when the rupee has been battered on account of shifting global trends. However, the battering is also partially due to the country's weak macroeconomic indicators. In this context, Foreign Institutional Investors (FII) outflows were also a factor, as well as the huge consumption and import of gold in the country.

In this context, Fitch's move is a sentiment booster. The battered rupee may get some respite as the rating upgrade will boost investor confidence. The rupee hit its lowest ever - 58.98 (intra-day) on Tuesday against the U.S dollar. On Tuesday, FIIs provisionally sold Rs 885 crore worth of Indian stocks.

"The authorities have also begun to address structural factors that have weakened the investment climate and growth prospects," Fitch said in the statement, explaining the rating change.

The upgrade will send out a positive signal to foreign investors to retain their faith in the India story. The government has been taking reformist steps, including allowing FDI in multi-brand retail since last September.

But the Fitch upgrade also comes on a day when the industrial output data for April was released. The news from the industrial front is not encouraging. The Index of Industrial Production (IIP) in April grew a meagre two per cent as compared to 3.4 per cent in March. This underlines the weakness of the manufacturing sector which is hurting the country's growth prospects.

The Consumer Price Index is hovering around 10 per cent. It came down slightly to 9.31 per cent in May from 9.39 per cent in April.

Considering all the above factors, it looks as though the RBI's hands will be tied, when it comes to cutting key rates in June.