Despite recovery, India facing uncertainty over medium-term debt

New Delhi: Fitch Ratings on Thursday said India's economy is rapidly recovering from the pandemic, but uncertainties remain around its medium-term debt trajectory. In its report 'What Investors Want to Know: Indian Sovereign and Financial Institutions in 2022', it said financial institutions face an uneven recovery due to lingering asset-quality risks and capital limitations. Fitch projects India's real GDP growth at a robust 8.4 per cent in 2021-22 and 10.3 per cent in next fiscal year, as the economy rebounds from its sharp pandemic-induced slowdown in 2020-21.

"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 February 1, 2022, budget," Fitch said.

Risks around the sustainability of India's downward debt trajectory were a key factor for maintaining the negative outlook when Fitch affirmed the 'BBB-' sovereign rating in November 2021. India's economy is rapidly recovering from the Covid-19 pandemic and the financial sector pressure appears to be easing, Fitch said.

"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," it added. The rating agency said 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," Fitch said.