Hong Kong: The sharp depreciation of the rupee in
mid-2013 highlights India’s difficult transition following an extended
period of low growth, high inflation and a widening in the current
account deficit.
Fitch Ratings says in a report published on Thursday that the
spillover effects of a weaker rupee have not significantly hurt India’s
creditworthiness, and hence would not trigger any rating action as this
point.
The economy has not lost much momentum, with both
agriculture and exports remaining resilient and providing a cushion.
Fitch therefore expects the economy to recover with real GDP forecast to
rise 4.8% and 5.8% in FY14 (financial year ending March 2014) and FY15,
respectively, compared with a 5.0% rise in FY13.
The modest economic recovery, however, will continue to
undermine India’s banking sector, which is facing a combination of
weakening asset quality, eroding profit and declining capital.
Nonetheless, these factors are likely to have only a moderate effect on
the banking sector’s ability to supply credit to the economy.
Inflation has risen only moderately, despite higher
import prices stemming from the weaker rupee. The Reserve Bank of India
(RBI) has also signalled that it has started to place a greater focus on
capping CPI.
The current account deficit is narrowing, following
measures to curb gold imports, a weaker exchange rate, and softer
domestic demand. Fitch forecasts the current account deficit to decline
to 3.1% of GDP in FY14 (versus 4.8% in FY13). This fall, however, will
not be enough to shield India from further pressures related to the
eventual start of Fed tapering.
India’s budget remains under pressure as the central
government’s (CG) fiscal deficit in the first six months of FY14 stood
at 76% of the full-year target. The authorities have indicated that they
are still committed to lowering the fiscal deficit to 4.8% of GDP
(versus 4.9% in FY13). To achieve this, the CG is likely to clamp down
heavily on expenditures in 2H FY14.
The ability to implement fiscal consolidation and
continue with the overall economic adjustment process would support
India’s sovereign credit ratings. Fitch, however, acknowledges that the
authorities’ resolve to implement both tighter fiscal and monetary
policies may be tested as the general election, which must be held by
May 2014, approaches.
MUNTAZIR ALAM
PGDM 1ST SEM
IIMT GREATER NOIDA
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