Dear All,

Fitch upgrades India 's outlook to stable from negative

India remains one of the most dynamic and diversified economies in the world

According to Fitch Ratings, the revision of its Outlook to Stable reflects the measures taken by the government to contain the budget deficit, including the commitments made in the FY14 budget, along with the limited progress made in addressing some of the structural impediments to investment and economic growth.

Fitch has affirmed its Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BBB-'. The agency has also affirmed the Country Ceiling at 'BBB-' and the Short-Term Foreign-Currency IDR at 'F3'.

The agency felt that the government has been successful in containing the upward pressure on the central government budget deficit in the face of a weaker-than-expected economy. Moreover, it is likely that India will meet its FY14 budget deficit target of 4.8% of GDP and gradually reduce the high level of public debt over the medium-term since the government has already begun to address structural factors that have weakened the investment climate and growth prospects, notably regulatory uncertainty, delays in government approvals of investment projects and supply bottlenecks. The agency added that the establishment of a Cabinet Committee on Investment should help to fast-track infrastructure-related projects. Nonetheless, it feels that the investment climate could benefit from further reforms, such as the new land acquisition bill, some liberalisation of insurance and pension provision and public procurement. Addressing the structural issues in the power and mining sectors would further boost investor confidence.

Fitch also noted that inflation pressures have begun to show more pronounced signs of easing in response to weaker economic conditions and the tightening of monetary conditions by the RBI during the course of 2011-12. Fitch added that the economy is expected to recover after real GDP grew just 5% in FY13 (vs. 6.2% in FY12). However, India 's economic recovery is likely to remain slow until a healthier investment climate is created, which helps lift potential growth again.

On the banking side, Fitch reported that the profitability and capital position of the banking sector will remain under pressure as asset quality continues to gradually deteriorate. Nonetheless, Fitch does not view the banking sector as a material risk to macro-financial stability nor to public finances in terms of the crystallisation of large contingent liabilities. Fitch considers India 's overall external position to be a relative rating strength, despite deterioration in the current account deficit. India 's investment-grade ratings are also underpinned by high domestic savings rates that limit the reliance on foreign savings for private investment and fiscal funding, as well as by a relative long maturity of government debt issued in its own currency. While Fitch has revised down its assumption regarding potential growth to 6%-7% from 8%-9%, it remains one of the most dynamic and diversified economies in the world. However, India 's sovereign ratings remain constrained by persistent structural budget deficits and high public debt as well as by the challenges associated with large segments of the population engaged in low-valued added activities.

Warm regards,

Dr. S P Sharma

Chief Economist