American rating agency Fitch on Monday retained India’s sovereign rating at the lowest investment grade of “BBB-/stable”, saying the country will continue to post good growth despite subdued prospect for the Asia Pacific region in a situation of “dollar strength in the context of an expected rise in US (Federal Reserve) rates and lower commodity prices.
“India and Vietnam have favourable macroeconomic prospects, partly reflecting lower exposure to some of the negative pressures affecting the region; however, weaknesses in their public finances have deterred us from taking positive ratings action,” Fitch said in a report titled “Emerging Asia Sovereign Outlook 2016″.
“Dollar strength in the context of an expected rise in US rates, still-sluggish global trade growth and lower commodity prices pose a challenging set of circumstances for Emerging Asia in 2016 – which partly explains why the high growth rates of the mid-2000s look out of reach,” it said.
The report said the US Federal Reserve is largely expected to make its first rate hike in almost a decade during its upcoming two-day meeting beginning on Tuesday, which would act as headwinds for emerging Asian economies.
Emerging Asia’s growth in 2016 is expected to slow to 6.3 percent, from 6.5 percent, mostly due to the projected slowdown in China.
Fitch said that excluding China and India, the region is projected to expand 5.2 percent in 2016, from 5 percent, which it said would be the fastest for any emerging region.
Moreover, emerging Asian external balance sheets are generally stronger than in 1996, the year before the onset of the Asian financial crisis.
“Sovereigns are generally much less reliant on foreign currency financing, and many countries now have more flexible exchange-rate regimes in place of the more prevalent use of explicit pegs before 1997,” the report said.
Fitch said in a report last week that India’s economy will grow by 7.5 percent in the current fiscal that will stand out globally, but warned that its business environment would remain weak despite improvements.
The agency said a “BBB-” rating, the lowest in the investment grade, along with a stable outlook and a strong medium-term growth prospect and favourable external finances, will balance out with high government debt, weak structurals and a difficult, but improving, business environment.
It said while India’s sovereign ratings continued to be constrained by the limited fiscal space of the government, the 23.6-percent salary hike recommended by the 7th Pay Commission has raised doubts about the feasibility of the medium-term consolidation path.
On inflation, it said, India’s 7.9-percent average in annual price rise over the past five years was much higher than the 3.3-percent level among the peers with the same rating. But the changes in the retail inflation profile strengthened India’s sovereign credit profile.
Meanwhile, India’s annual retail and wholesale inflation rates rose considerably in November to 5.41 percent and (-)1.9 percent respectively, due largely to an increase in the prices of food items like pulses, official data showed on Monday.