In a big boost to investors sentiment and relief to government, the international ratings agency - Fitch Ratings has upgraded India's outlook to ‘Stable’ from ‘Negative’ and affirmed credit rating at BBB-, citing government measures to contain the budget deficit and the progress made in improving investment and economic growth. This unexpected upgrade comes as a sigh of relief to the government during a time when the rupee had plunged to a record low.
The revision in outlook and rating affirmation reflects that the government was successful in containing budget deficit to 4.9% in 2012-13 as against 5.7% in 2011-12 in the face of a weaker-than-expected economy. Further, the rating agency also expects the country to meet its FY14 fiscal deficit target of 4.8%. The agency has also affirmed and the Short-Term Foreign-Currency IDR at 'F3'.
As per the agency, inflation pressures have begun to show more evident signs of easing in response to weaker economic conditions and the tightening of monetary conditions by the Reserve Bank of India (RBI) during 2011-2012. However, the recent weakness of the exchange rate may complicate policy management and limit the scope for further cuts in RBI policy rates.
On the growth front, Fitch expects economy to recover after real GDP grew just 5% in 2012-13 as against 6.2% in 2011-12; however, it is likely to remain slow until a healthier investment climate is created. The agency forecast only a modest recovery with GDP likely to expand 5.7% and 6.5% in 2013-14 and 2014-15 respectively.
Moreover, the international ratings agency expects the establishment of a Cabinet Committee on Investment (CCI) to fast-track infrastructure-related projects to benefit the investment climate, which would further enhance after the passage of new land acquisition bill, some liberalization of insurance and pension provision and public procurement, which are pending for parliamentary approval.
Furthermore, Fitch considers India's overall external position to be a relative rating strength, despite deterioration in the current account deficit, in part due to an increase in gold imports. However, it stressed that the country’s sovereign ratings remain constrained by persistent structural budget deficits and high public debt.
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