Fitch Ratings lowers India's currency IDR to negative from stable

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Mumbai, Jul 15 (UNI) Forecasting the Central Government deficit to increase to 4.5 per cent of the GDP in 2008-09 as against 2.8 per cent in 2007-08, Fitch Ratings today revised India's long-term local currency Issuer Default Rating (IDR) to Negative from Stable, while affirming the rating at 'BBB-' (BBB minus).

At the same time, the agency has affirmed India's long-term foreign currency IDR at 'BBB minus', with a Stable Outlook and its Short-term foreign currency IDR at 'F3' and Country Ceiling at 'BBB minus'.

Commenting on the revision Head of Asia Soverin Ratings James McCormack in a release issued here stated, ''The revision to the local currency Outlook is based on a considerable deterioration in the central government's fiscal position in 2008-09 (FY09), combined with a notable increase in government debt issuance to finance subsidies not captured in the budget.'' The deficit would go up this fiscal due to higher on-budget subsidies, interest payments and public wages. The agency expects bonds issued to oil and fertilizer companies to reach at least two per cent of GDP this year, implying an underlying central government deficit of 6.5 per cent of GDP or higher.

''Future rating actions with respect to India's local currency rating will depend largely on whether the FY09 fiscal slippage is reversed, which would allow for a resumption of the decline in India's high government debt ratios,'' he added.

Higher oil prices have raised India's oil import bill dramatically over the past three years, and the merchandise trade deficit was equivalent to 7.7 per cent of GDP in FY08. The current account deficit was much smaller, however, at 1.5 per cent of GDP, as services exports and remittance inflows remained very strong. Fitch expects the trade deficit to widen further in FY09, to 8.2 per cent of GDP, but the current account deficit was projected to be broadly unchanged.

Fitch said, in FY08, the current account deficit was easily financed, with substantial portfolio equity inflows and commercial borrowing leading to a record-high accumulation of official foreign exchange reserves.

Based on the change in global investor risk appetite and the less certain short-term macro-economic outlook for India, Fitch believes capital inflows will decline sharply in FY09, but they are expected to be sufficient to finance the current account shortfall.

India's external solvency indicators continue to compare favourably with those of its rating peer group, and still support a Stable Outlook on the sovereign's foreign currency IDR.

It was one of the few countries with foreign exchange reserves of more than USD 300 bn, contributing to a sizeable net external creditor position and a liquidity ratio (liquid external assets relative to liabilities) exceeding 260 per cent. India's external debt service payments are equivalent to less than five per cent of current external earnings (current account receipts), well below the 'BBB' median of 12 per cent.

Inflation continues to accelerate despite recent actions by the Reserve Bank of India in raising the Cash Reserve Ratio and policy interest rates. With increases in the Wholesale Price Index (WPI) approaching 12 per cent, Fitch believes further monetary tightening will be forthcoming. The agency has revised downward its FY09 GDP growth forecast to 7.7 per cent.

Risks to the economic outlook include the possibility of additional upward pressure on prices, especially if inflation expectations become entrenched and weaker economic growth if real interest rates increase on the back of higher inflation and additional public sector debt financing. Weaker economic growth and higher real interest rates would affect the fiscal outturn and further undermine international capital flows.

UNI VK GR SM1357

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