Fortified finances. Limited risk to India’s sovereign rating from external pressure, says Fitch

Amid criticism on the forex reserve losing $100 billion in a year, global rating agency Fitch on Wednesday said India’s external buffers appear sufficient to cushion risks associated with rapid monetary policy tightening in the US and high global commodity prices.

Fitch has assigned ‘BBB-‘sovereign rating with stable outlook. This is the last investment-grade rating.

India’s forex reserve stood at $533 billion while current account deficit (higher outgo than receipts in dollar) widened to $23.90 billion in the first quarter of fiscal year 2022-23 — the highest since the December quarter of 2012. However, as a percentage of GDP, CAD was at 2.8 per cent — the highest in nearly four years.

Still, Fitch is finding positives. “Reserve cover remains strong at about 8.9 months of imports in September. This is higher than during the taper tantrum in 2013, when it stood at about 6.5 months, and offers the authorities scope to utilise reserves to smooth periods of external stress. Large reserves also provide reassurance about debt repayment capacity. Short-term external debt due is equivalent to only about 24 per cent of total reserves,” the agency said in a statement

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FII impact

Last week, another global rating agency, S&P Global Ratings, had said that India is facing various factors that may shake its sovereign credit metrics but strong economic growth rate and external balance sheet are expected to neutralise the risks inherent in the global environment. Some of these elements also echoed in a statement by Fitch.

Fitch noted that gross external debt stood at 18.6 per cent of GDP in 2Q22, which is low compared with the median of 72 per cent for ‘BBB’ rated sovereigns in 2021. Sovereign exposures are small, with only about 4 per cent of GDP in primarily multilateral financing. Foreign investor holdings of domestic sovereign debt represent under 2 per cent of the total, reducing risk of spillovers to the wider market should they seek to reduce their exposure

Public finances

The agency said that external finances are becoming less strong in India’s credit profile, but “we expect foreign-exchange reserves to remain robust and India’s current-account deficit to be contained at a sustainable level.” Moreover, public finances remain the key driver of the rating and are only modestly affected by these developments, particularly as India is relatively insulated from global volatility due to the sovereign’s limited reliance on external financing.

The agency estimates India’s current-account deficit in the fiscal year ending March 2023 (FY23) will reach 3.4 per cent of GDP, from 1.2 per cent in FY22. Imports have surged on strong domestic demand growth and high oil and coal prices. Meanwhile, export growth has moderated from the fast pace seen in January-June 2022, amid declines in prices of steel, iron ore and agricultural products.

Recessions in key European and US export markets will weigh on near-term export prospects. However, “we forecast the current-account deficit to narrow in FY24, to 2 per cent of GDP, as easing global energy prices will also dampen imports. Our robust medium-term economic growth outlook on India should facilitate financing of the deficit, particularly from FDI,” it said.

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