Fitch affirms India's sovereign rating at ‘BBB-‘

Global rating agency Fitch has affirmed India's sovereign Ratings at 'BBB-', the lowest investment grade, backed by a strong medium-term growth outlook and favourable external balances. The outlook on the same is stable, constrained by a weak fiscal position and still-difficult business environment. However, the rating agency cautioned that there will be risk to the current rating if the public-debt burden worsened further, loose macroeconomic policy lead to persistently high inflation levels and an external funding stress emerged from widening current-account deficit.

Rating agency said that the affirmation of India's sovereign ratings balances a strong medium-term growth outlook and favourable external balances against a weak fiscal position and still-difficult business environment. However, it expects India's business environment to improve with "implementation and continued broadening of the government's structural reform agenda."

Fitch further forecast GDP growth to slightly accelerate from 7.6 percent in FY16 to 7.7 percent in FY17 and 7.9 percent in FY18, driven by an expected pick-up in consumption in both urban and rural areas. Fitch expects the government's continued structural reform push to support GDP growth in the medium term. At the same time it said that, weak private investment indicated that the economy was still not firing on all cylinders.

With NPAs rising, Fitch estimated the banking system needs around $90bn of capital, while many public-sector banks are likely to find it difficult to access new capital from non-government sources. It also said that weak fiscal balances continue to constrain its ratings, but for FY16 government sticking to its 3.5% target for FY17 has strengthened its fiscal credibility.