Fitch assesses uncertainty ahead of finalizing India rating action

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New Delhi: Global rating agency Fitch assesses the degree of uncertainty surrounding India’s medium-term fiscal and growth outlook before finalizing a rating action. In an email interview to mint, Fitch’s sovereign ratings team pointed out that rising funding costs amid growing global uncertainty would pose a risk to India’s sovereign ratings. He expects near-term fiscal consolidation to become more difficult with rising commodity prices, the likely reduction in excise duties on petrol and diesel, in addition to the impact of winds. larger opposites. Fitch also expects government borrowing needs to remain high. Edited excerpts

Fitch had noted in its post-budget note that India’s fiscal consolidation could be slower than expected. What impact do you see from the Russian-Ukrainian tension on India’s overall fiscal deficit? With LIC’s IPO also postponed to next year and oil and commodity prices reaching record highs, will it be harder to contain the deficit to 6.4% of GDP in the year? next ?

Near-term fiscal consolidation will become more difficult with rising commodity prices, potential efforts to protect consumers from higher prices, such as excise duty cuts, and the impact of more economic headwinds. wide. However, the government’s budget has provided some leeway for higher spending due to its conservative revenue assumptions, which could help the government stay close to its FY23 deficit target.

Do you expect government borrowing and the cost of borrowing to increase next year? What impact do you estimate on sovereign debt?

Government borrowing needs are expected to remain high due to large and persistent budget deficits. The cost of funding these deficits has increased over the past few months and is likely to come under continued pressure amid our expectations of a gradual tightening of RBI policy and increased volatility in global financial markets, although , compared to its peers, India is somewhat more isolated from global markets. Rising funding costs would present rating risks as India already has a high interest burden compared to its peers and adds to challenges for the trajectory of public debt.

How high are the risks now due to the Russian-Ukrainian crisis?

Risks to the leverage ratio have increased in the context of rising commodity prices, but the degree of risk over the medium term, which is our primary focus, will depend on how long the price rise lasts. A slower pace of fiscal consolidation means that sustained high rates of nominal GDP growth will be needed to sustainably reduce the debt ratio. We expect India’s economy to remain one of the fastest growing in the world, but real GDP growth will be dampened by rising commodity prices. Higher inflation could, however, keep nominal growth high.

With India’s debt level already higher than its peers in the group, do you think India could be threatened with a sovereign rating downgrade? When can we expect action to be taken?

We have India’s BBB- rating on the negative outlook. The outlook reflects India’s high debt ratio relative to its peers and uncertainty about the government’s ability to reduce this ratio over the medium term. We will continue to assess the degree of uncertainty surrounding the outlook for medium-term fiscal consolidation and growth prospects before deciding the outlook one way or the other.

What is your assessment on the rupee front? What levels do you see against the US dollar?

The rupee has only come under modest pressure in recent weeks. We expect further mild depreciation to be in the cards, based on the outlook for capital outflows. The RBI has considerable firepower, thanks to its large foreign exchange reserves, to manage potential episodes of significant exchange rate volatility.

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