Fitch brings relief to the economy - Livemint

Updated: Thu, Jun 13 2013. 12 31 AM IST New Delhi: Global rating agency Fitch Ratings offered India relief from a flood of bad tidings—a depreciating rupee, weak factory output data and sticky retail inflation—by upgrading the country's sovereign credit outlook to stable from negative. The upgrade came on a day the Central Statistics Office (CSO) released data showing a continued contraction in mining output and almost flat electricity production, which limited factory output growth to 2% in April compared with a revised growth of 3.4% in the previous month. The volatile capital goods segment, a measure of investment demand in the economy, grew at 1% in the first month of the fiscal year. While mining contracted for the seventh month in a row at 3% in April, manufacturing grew 2.8% and electricity production rose only marginally by 0.7%. Consumer price inflation data released by CSO on Wednesday showed retail inflation decelerated only marginally to 9.31% in May compared with 9.39% a month ago. Fitch's upgrade of India's outlook to stable on Wednesday means that the credit assessor is more likely to retain the country's sovereign rating of BBB-, the lowest investment grade, than lower it. The revision comes within a month of Standard & Poor's warning that there was a one-in-three chance of a downgrade in the country's sovereign rating to junk status in the next 12 months. India's economic growth slumped to a decade-low 5% in the year ended March as companies held back investment and consumers low on confidence reduced spending in the face of borrowing costs that were kept high by the central bank to lower inflation. On Wednesday, the government projected hope. "We will see a revival in investments in the next four to six months," said Arvind Mayaram, economic affairs secretary in the finance ministry. Fitch Ratings said the revision of the outlook to stable reflected the measures taken by the government to contain the budget deficit, including commitments made in the 2013-14 fiscal package, as well as some progress in addressing structural impediments to investment and economic growth. Through a drastic cut in Plan spending, finance minister P. Chidambaram was able to limit the fiscal deficit in 2012-13 to 4.9% of gross domestic product (GDP) against the revised estimate of 5.2% of GDP. Fitch expects the government to meet its 2013-14 budget deficit target of 4.8% of GDP and to gradually reduce the high level of public debt over the medium term. Even before Fitch's revision, the rupee strengthened on dollar weakness against major currencies after having slumped to a lifetime low of 58.99 per dollar in intra-day trading on Tuesday. Currency dealers said the rupee's recovery was partly due to the fact that its decline had been overdone. The currency closed at 57.79/80 a dollar from its Tuesday close of Rs.58.39 a dollar. In intra-day trade, it had touched the 57.72 per dollar level. Abhishek Goenka, chief executive officer of India Forex Advisors Pvt. Ltd, expects the rupee to test the 57.25 level in the coming days on technical grounds. The rupee has depreciated 5.5% against the dollar since January—on par with the currencies of South Korea, Turkey and Brazil—but its 7.5% decline since 1 May has investors worried. The decline has been more pronounced after the US Federal Reserve chairman Ben Bernanke announced last month that its asset purchases may be tapered down in September. Fitch said inflationary pressures had begun to show more pronounced signs of easing in response to weaker economic conditions and the tightening of monetary conditions by the Reserve Bank of India (RBI) during 2011-2012. "The recent weakness of the exchange rate may, however, complicate policy management and limit the scope for further cuts in RBI policy rates," he said. Fitch noted that India had begun to tackle structural factors that have weakened the investment climate and growth prospects, "notably regulatory uncertainty, delays in government approvals of investment projects and supply bottlenecks, for example, in the power and mining sectors". The agency expects the economy to recover to expand 5.7% in 2013-14 and 6.5% in 2014-15. "India's economic recovery, however, is likely to remain slow until a healthier investment climate is created, which helps lift potential growth again," it added. Fitch cautioned that larger-than-projected budget deficits, a further decline in India's potential growth rate, a sustained rise in inflation, greater-than-expected deterioration in the asset quality of the banking sector and sustained deterioration in the current account deficit could trigger a negative rating action by the agency. "Despite deterioration in the current account deficit, in part due to an increase in gold imports, Fitch considers India's overall external position to be a relative rating strength. Foreign debt is moderate and RBI's international reserves, which stood at $288 billion at the end of May, provide a cushion to absorb adverse external shocks," the agency said. The outlook revision by Fitch was a welcome development although there are no decisive signs of a turnaround in the economy, said Ajit Ranade, chief economist at the Aditya Birla Group. "Even as rupee has weakened, Fitch has focused on the better-than-expected fiscal performance of the government," he said. "The economy is still not far from the bottom." The recent depreciation of the rupee may keep RBI on a vigil that may prevent a rate-cut in the 17 June policy review, Yes Bank Ltd chief economist Shubhada Rao said. "By July, a clearer picture is likely emerge on performance of monsoon and thus on the outlook for food inflation. In this backdrop, we reaffirm our call that RBI will cut policy repo rate by 25 basis points in July," she said. A basis point is one-hundredth of a percentage point. The recent rupee depreciation has complicated the situation for RBI, but the central bank will still likely cut rates by 25 basis points on 17 June, according to Kotak Mahindra Bank Ltd chief economist Indranil Pan. "We believe the recent rupee fluctuations are in line with global trends and likely dependent on transient factors," Pan said. "The RBI might not immediately want to signal a pause in the easing cycle as a sudden stop can have implications for domestic money market rates and hurt chances of growth recovery." Anup Roy in Mumbai contributed to this story. via Business - Google News http://news.google.com/news/url?sa=t&fd=R&usg=AFQjCNHF6id8vUgEnfRwl7fJjQYaZYQ0Yw&url=http://www.livemint.com/Politics/7iz68hE0PF1kJfbokAcOgM/Fitch-revises-Indias-rating-outlook-to-stable.html

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