Fitch Ratings on Tuesday kept India’s sovereign rating unchanged at “BBB-” with a negative outlook due to a rise in public debt ratio and uncertainty on the debt trajectory.
The negative outlook on the rating reflects lingering uncertainty around the medium-term debt trajectory, particularly given India’s limited fiscal headroom .
Fitch said the rating balances a still-strong medium-term outlook and external resilience from solid foreign-reserve buffers. The rapid recovery from the pandemic is narrowing risks to the medium-term growth outlook.
The rating agency said “immediate financial-sector pressure has eased, in part due to regulatory forbearance measures that are providing banks with time to rebuild capital buffers. The level of asset quality deterioration from the pandemic, while masked by forbearance relief, also appears less severe than we had anticipated.”
The recently incorporated National Asset Reconstruction Company (bad bank) could help banks address our expected build-up of impaired loans, while sustaining adequate credit growth, though more details are needed to fully assess its potential.
“Still, we expect credit growth to remain constrained, averaging at 6.7% year on year over the next several years, unless adequate recapitalisation can mitigate the risk aversion currently seen among banks,” it added.