Fitch Revises India's Outlook to ‘Negative’

Global credit ratings agency Fitch has revised the outlook of India to ‘Negative’ from ‘Stable.  The agency has said that the revised outlook reflects increased risk profile of the country. It has also said that the long to medium term growth potential may further deteriorate if reforms are not expedited in the country.

This is another shock the government as it is trying to start process of reforms again in the country. The recent hike in the petrol prices, announcement of the infrastructural projects was a part of it. The revision of the outlook has come after another agency Standard and Poor’s warned that India may lose its investment grade and will be the first BRIC country to get that shock. S&P had earlier revised its outlook for India as ‘Negative’.

Fitch has pointed out the issue of the high inflation in the country. It has said the country has very high foreign exchange reserves which provide a cushion against any potential external shocks. The growth drivers such as service sector and well educated population etc remain intact. It has also forecasted that the growth of the country this year will be around 6.5%. This is below from earlier estimates of 7.5%. The credit rating agency also believes that the inflation will remain above 7% in this fiscal. Fitch has called this as an awkward situation where there is high inflation and the growth is below the potential. Under this scenario, the country may miss the target of 5.1% of GDP deficit this year.

The decline in inflation, growth in the investments and infra projects will help the country to enhance its risk profile.

Earlier today, RBI has kept its key policy rates unchanged which means that the markets will remain heavy. The rupee after RBI meet and Fitch’s rating action has fallen to near 56 levels again.

Meanwhile India's chief economic adviser Kaushik Basu said that Fitch’s action was based on the herd mentality. We believe that Govt. must take the reforms measure now as it will be facing the election in next two years. If not now then the country may lose the investment grade which will hamper the investments in the country. Besides we may see rupee sliding further increasing the worries of the economy.

The equity markets may see some sell offs from the FII’s which will keep the equity returns under huge pressure in this week.