Sustained Recovery Key to Resolving India’s Fiscal, Asset-Quality Risks

Fitch Ratings-Hong Kong/Singapore/Mumbai: India’s economy is rapidly recovering from the Covid-19 pandemic and financial-sector pressure appears to be easing, Fitch Ratings says. However, uncertainties remain around its medium-term debt trajectory, while financial institutions face an uneven recovery due to lingering asset-quality risks and capital limitations.

Fitch projects India’s real GDP growth will be robust at 8.4% in the fiscal year ending March 2022 (FY22) and 10.3% in FY23, as the economy rebounds from its sharp pandemic-induced slowdown in FY21. Nonetheless, the medium-term debt trajectory remains core to our sovereign assessment and fiscal consolidation may be slower than we previously expected based on the 1 February 2022 budget. Risks around the sustainability of India’s downward debt trajectory were a key factor for maintaining the Negative Outlook when we affirmed the ‘BBB-’ sovereign rating in November 2021.

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Indian banks’ and non-bank financial institutions' (NBFI) performance should improve gradually amid the economic momentum and extended regulatory forbearance. Still, lingering asset-quality strains and higher funding costs are likely to weigh on NBFIs’ earnings recovery, while state banks’ weaker profitability and capitalisation than that of private banks may constrain their capacity for growth and remain a drag on banking-sector performance.

The report “What Investors Want to Know: Indian Sovereign and Financial Institutions in 2022” is available at fitch ratings website