Fitch revises India’s outlook to Negative

Fitch revises India’s outlook to Negative

Last updated: 20 Jun, 2020 | 10:50 am

Fitch revises India’s outlook to Negative

Fitch Ratings has revised India’s long-term outlook to negative (from stable earlier), stating that the current pandemic has significantly weakened India’s growth outlook for this year and exposed the challenges associated with a high public-debt burden. The rating agency has maintained India’s rating at ‘BBB-,’ the lowest investment grade.

The rationale for the revised outlook

  • Fitch noted that India’s fiscal metrics have deteriorated significantly due to the impact of a growth slowdown on revenue, fiscal deficit and public sector debt ratios. Fitch expects general government debt to jump to 84.5% of GDP in FY21 from an estimated 71.0% of GDP in FY20
  • Fitch expects economic activity to contract by 5% in FY21, as a fallout of the strict lockdown measures imposed since 25 March 2020
  • A renewed rise in NPLs (non-performing loans) and the need for further financial government support now seem inevitable despite regulatory measures announced by the Reserve Bank of India (RBI)

Action taken by other rating agencies

How does this impact you

  • These revisions in outlook by rating agencies were largely expected and have been priced into markets.
  • Given that foreign portfolio investors hold only about 3.3% of total government securities, direct impact of this outlook change will be limited.
  • The real impact will be the heightened implied risk in the economy given that the sovereign rating is nearing ‘Junk’ status at which point Foreign fund flows into the country might take a deeper hit.
  • Reduction in FII flows into the country will have negative implications for the strength of our currency and the growth of the economy.

INDwealth analysis

  • Overall risk of debt defaults in the economy remains high at a corporate specific level. Sticking to high quality AAA-rated debt is extremely important. In this scenario it is better to err on the side of caution.
  • Both equity and debt markets are expected to remain volatile in the medium term
  • Invest in equities in a staggered manner. Keep your SIP’s running. Stick to large caps and index stocks that are best suited to navigate the economic crisis
  • Stick to AAA-rated low duration funds and bonds over high duration funds, and long-maturity bonds as yields will remain volatile in the near future but in the medium term (2-3 years) the rate cycle is expected to bottom out and move up.