Fitch cuts India rating outlook to negative

MUMBAI Mon Jun 18, 2012 4:52pm IST

1 of 2. An employee counts Indian currency notes at a cash counter inside a bank in Kolkata June 18, 2012.

Credit: Reuters/Rupak De Chowdhuri

MUMBAI (Reuters) - 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.

"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 for India of 66 percent of GDP at the end of the most recent fiscal year, compared with a median of 39 percent for BBB-rated countries.

India's economy grew just 5.3 percent in the March quarter, the weakest in nine years, but earlier on Monday the central bank unexpectedly left interest rates on hold, sending bonds, stocks and the rupee lower.

The rupee weakened further to 56 per dollar from around 55.82 before the Fitch statement. Bond yields were range-bound, while stocks were already shut for the day.

"Against the backdrop of persistent inflation pressures and weak public finances, there is an even greater onus on effective government policies and reforms that would ensure India can navigate the turbulent global economic and financial environment and underpin confidence in the long-run growth potential of the Indian economy," Art Woo, a Fitch director, said in a statement.

Fitch maintained its BBB- rating, the lowest investment grade.

Fitch said it expects the Indian economy to grow just 6.5 percent in the fiscal year that ends in March, down from its earlier forecast of 7.5 percent, while it expects wholesale price index inflation to average 7.5 percent.

"India also faces structural challenges surrounding its investment climate in the form of corruption and inadequate economic reforms," it said.

A week ago, S&P said India could become the first of the BRIC economies, which also include Brazil, Russia and China, to lose its investment-grade status, prompting an angry response from the government.

(Reporting by Tony Munroe; Editing by Aradhana Aravindan)

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