Nomura says India needs to tread carefully as Fitch rings warning bell


According to Fitch, further negative rating action could be triggered by a structurally weaker growth outlook from financial stability concerns or a stalling of reform implementation.



After Fitch Ratings revised India’s sovereign rating outlook to 'negative', while maintaining the rating at 'BBB-', global brokerage firm Nomura said it sees a potential for the next rating action to occur as early as the end of 2020 or the start of 2021.


India’s patchy record on fiscal consolidation suggests risks to the medium-term outlook, said Nomura.


"In line with our expectations, Fitch Ratings revised India’s sovereign rating outlook to 'negative', whi=-0le maintaining the rating at BBB-, which is at the same level as the recently downgraded rating and negative outlook by Moody’s. While all major rating agencies continue to rate India at one notch above junk, Standard and Poor’s remains the only one of the trio to still assign a 'stable' outlook," Nomura said in a note.


In light of the recent rating downgrades, Nomura advises treading cautiously.


"As we flagged previously, India’s previous track record of lackadaisical fiscal consolidation since the Global Financial Crisis has been a persistent worry for Fitch. Also, while all rating agencies concur that current conditions do not warrant a rating downgrade (to junk), they are concerned by the direction of macro fundamentals, and would like to see the resolution of some of these uncertainties before providing a final evaluation on ratings," Nomura said.


Based on the commentary by the three rating agencies, Nomura said there are three main tests India must face before its ultimate rating outcome is determined:


  • The extent to which the economy recovers from the pandemic.

  • Whether burgeoning financial stability risks can be contained.

  • Whether the damage to the medium-term fiscal outlook can be addressed by a credible post-pandemic fiscal consolidation roadmap.


"While rating agencies are cutting the economy some slack for the next six months or so, 2021 remains a crucial year for India to either disprove or affirm these concerns. We see the potential for the next rating action to occur as early as the end of 2020 or the start of 2021," Nomura said.


As per Nomura, rating revision from Fitch had key reasons. First, similar to the forecasts announced by its peers, Fitch expects GDP growth to average -5 percent YoY in FY21 and general government debt to jump to 84.5 percent of GDP from 71 percent in FY20.


Second, Fitch expressed concerns over balance sheet stresses in the banking and shadow banking sectors, with an expectation of rising bad loans and increased pressure on public sector banks, which remain at the forefront of driving the moratorium on the recognition of impaired loans and the relaxation of bank lending limits.


Nomura highlighted that Fitch’s concerns were assuaged by the domestic holdings of public debt and the RBI’s accumulation of forex reserves ($502 billion), which represents higher current account payment coverage than the BBB- median.


The credible inflation-targeting framework also acts as a buffer against concerns that India may choose to deflate away its debts, as does the government’s commitment to structural reforms and improving the ease of doing business. Fitch expects the RBI to deliver another 25bp of policy rate easing in FY21.


Fitch's rating action has a warning bell also.


According to Fitch, further negative rating action could be triggered by a structurally weaker growth outlook from financial stability concerns or a stalling of reform implementation. This could also be triggered by an absence of credible fiscal consolidation, as pandemic concerns fade.


Success in these endeavors, however, could portend a possible reversal of this rating action by Fitch.


As per Nomura, Fitch separately mentioned geopolitical risks related to the border scuffles with China and Pakistan, and that the government’s focus on its “nationalist agenda” could become a “distraction for economic reform implementation and could further raise social tensions.”


Source - MONEY CONTROL

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