Fitch affirms India at BBB-minus, Covid not to derail economic recovery

Fitch Ratings has affirmed India's long-term foreign-currency issuer default rating (IDR) at BBB-minus and said the surging second wave of Covid-19 might delay GDP recovery but will not derail the economy.

Fitch has forecast a 12.8 per cent recovery in GDP in the fiscal year ending March 2022 (FY22), moderating to 5.8 per cent in FY23 from an estimated contraction of 7.5 per cent in FY21.

However, a recent surge in coronavirus cases poses increasing downside risks to the FY22 outlook. "This second wave of virus cases may delay the recovery, but it is unlikely in Fitch's view to derail it."

In particular, the strong rebound in 2H FY21 and ongoing policy support underpin expectations for a recovery. "We expect pandemic-related restrictions to remain localised and less stringent than the national lockdown imposed in 2Q20, and the vaccine rollout has been stepped up," said Fitch.

India's rating balances a still strong medium-term growth outlook and external resilience from solid foreign-reserve buffers against high public debt, a weak financial sector and some lagging structural factors.

However, the negative outlook reflects lingering uncertainty around the debt trajectory following the sharp deterioration in public finance metrics due to the pandemic shock from a previous position of limited fiscal headroom.

Fitch said wider fiscal deficits and government plans for only a gradual narrowing of the deficit put greater onus on India's ability to return to high levels of GDP growth over the medium term to stabilise and bring down the debt ratio.

Weaknesses in financial sector pose a risk to the medium-term outlook. The degree of asset quality deterioration from the pandemic shock is unclear amid regulatory forbearance measures and renewed pressures from the second wave.

"We expect inflation to decline to an average of 4.4 per cent in FY22 after hovering above the Reserve Bank of India's (RBI's) 2 to 6 per cent target band for much of FY21. Price pressures have moderated even though both headline and core inflation remain near the upper end of the band."

Fitch expects the RBI to keep the policy rate stable in the coming year following 115 basis points in cuts since March 2020.

( With inputs from ANI )