Fitch maintains India's rating at BBB-Stable, as coalition government takes shape at centre

Fitch Ratings has maintained its assessment of India's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB-' with a Stable Outlook, despite the coalition government following the recent election results.

The affirmation of India's rating highlights Fitch's confidence in the nation's economic resilience and potential for growth, even in the face of political fragmentation.

Traditionally, coalition governments are perceived as unstable, often leading to slower policy implementation and economic reforms.

However, India's rating stability suggests that the country's underlying economic fundamentals are strong enough to withstand such political dynamics.

Earlier this year, in January, Fitch Ratings assigned India a stable outlook, reflecting a positive assessment of the country's economic conditions and prospects.

The recent elections, which culminated in a coalition government, have not altered Fitch's outlook.

This decision highlights the agency's belief that India's robust economic growth and solid external financial position are significant strengths that support the country's rating.

In the past coalition governments often resulted in slower decision-making processes and policy execution, but with the BJP dominating the new NDA coalition India's economic outlook remains positive.

One of the key factors supporting India's rating is its strong growth outlook.

According to the Fitch Ratings, India is expected to remain one of the fastest-growing economies globally, with a projected GDP growth rate of 6.9% for the fiscal year 2024.

On inflation in FY25, the report says that RBI may cut its policy rate by 75bp in FY25.

The report also highlights that the improved health of the banks and corporate balance sheets should pave the way for a positive investment cycle.

Sustained reform could support and boost growth prospects, but risks may arise from an uneven implementation record.

This growth forecast reflects the country's ability to sustain high economic performance and underscores the resilience of its economic model.

India's large and diverse economy, with significant contributions from various sectors including services, industry, and agriculture, provides a stable foundation for continued growth.

However, despite these strengths, India faces several significant challenges that constrain its rating.

Weak public finances are a notable concern, characterized by high debt levels and substantial fiscal deficits.

These issues indicate a need for fiscal consolidation and more effective management of public finances to ensure long-term economic stability.

Additionally, structural metrics in India lag behind those of its peers. This includes areas such as infrastructure development, regulatory environment, and ease of doing business.

Addressing these structural weaknesses is crucial for sustaining high growth rates and improving overall economic efficiency.India's sound external finances also play a critical role in supporting its rating.

The country has managed to maintain a favourable balance of payments position, with adequate foreign exchange reserves and a manageable current account deficit.

These factors contribute to a stable external financial environment, which is essential for attracting foreign investment and fostering economic growth.

While good growth and sound external finances are significant positives, the challenges of weak public finances and structural inefficiencies remain.

Addressing these issues will be key to sustaining long-term economic growth and improving India's credit profile.