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RBI stuns Markets, India’s outlook to negative from stable: Fitch Ratings

RBI stuns Markets

RBI stuns Markets, India's outlook to negative from stable: Fitch Ratings

The RBI defied widespread expectations to revive the flagging economy & disappointed the markets in a bid to tame the inflation by keeping the policy repo rate unchanged at 8% in its mid-quarter monetary policy. The repo is the rate at which, banks borrow from the regulator. Accordingly, the reverse repo rate at which, banks lend money to RBI stands at 7%. The cash reserve ratio (CRR) or the share of deposits lenders need to keep with the regulator too remains unchanged at 4.75%.

RBI said a rate cut now could “exacerbate” the country’s inflation, the highest among industrialized or BRIC nations. Bonds, stocks and the rupee fell after the decision and economists scaled back their expectations for future rate cuts.  Unless the government takes steps on fiscal adjustment, the RBI is not prepared to cut rates.

Fitch Ratings has revised India’s outlook to negative from stable. The news came in today at a time when the market was grappling with Reserve Bank of India’s unexpected stance – of not going with the popular expectation of a rate cut.

Fitch says the revision in its outlook is reflective of heightened risks that India’s medium- to long-term growth potential will gradually deteriorate if further structural reforms are not hastened, including measures to enhance the effectiveness of the government and create a more positive operational environment for business and private investments.

“A significant loosening of fiscal policy, which leads to an increase in the gross general government debt/GDP ratio, would result in a downgrade of India’s sovereign ratings,” Fitch said in a statement on Monday. The agency estimated general government debt forIndiaof 66% of GDP at the end of the most recent fiscal year, compared with a median of 39% for BBB-rated countries.

Credit rating agency Standard and Poor’s had warned last week that India may become the first among the BRIC (Brazil, Russia, India and China) countries to lose its investment grade rating, prompting an angry response from the government. It had cited slowing GDP growth and political roadblocks to economic policymaking as some of the factors that could lead to such an action.

The rating affirmation reflects India’s diversified economy and its high domestic savings which reduce reliance on foreign investors for private investment and fiscal funding. The Indian government is able to issue long-term debt at a low cost in its own currency.

Net external debt is very low and still high foreign exchange reserves of the Reserve Bank of India (RBI) provide a cushion against potential external shocks. The underlying drivers of the last decade of rapid economic growth remain in place – a fast growing pool of educated workers and an innovative private services sector.

Art Woo, director of Fitch Ratings says,India’s economic and fiscal prospects have weakened. “We became quite aware that the government is having a tough time improving the investment climate. It seems to be hindering growth prospects off late. So, that’s how we came about with the negative outlook,” he elaborates. The negative outlook, he says, more precisely means that over the next 12-24 months there is a probability or more than a likely chance that India’s ratings could be downgraded.

Finance Minister Pranab Mukherjee said on Monday Fitch has not taken note of recent structural reforms in the economy including the strengthening of public finances, after the rating agency cut its outlook on Asia’s third largest economy . “The concerns expressed by Fitch on the economic growth potential, inflationary pressures, and weak public finances are based on earlier data. Government has already taken note of such concerns,” Mukherjee said in a statement.

Fitch Ratings cut its credit outlook for India to negative from stable, nearly two months after rival Standard & Poor’s made a similar call, citing risks that India’s growth outlook could deteriorate if policymaking and governance don’t improve.

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