“MUMBAI (Reuters) – Fitch Ratings returned India’s sovereign outlook back to “stable” from “negative” a year after its initial downgrade, surprising markets with a validation of the government’s efforts to contain the fiscal deficit and revive economic growth.
The upgrade is likely to be a welcome relief to the government, coming during a period when the rupee had slumped to a record low, and be seen as a reward after months of efforts to cut spending, passing fiscal reforms, and wooing foreign investors.
Analysts, however, were sceptical about the upgrade, reflecting their pessimism about economic growth prospects at a time when inflation, although easing, remains high while the current account deficit remains a thorn to policy makers.
Prime Minister Manmohan Singh’s minority coalition also faces important state votes due before a national election next year, putting into doubt whether it can keep fiscal discipline and pass additional reforms in a gridlocked parliament.
“Challenges remain on the macro economy front, with the weakening rupee and the uncontrollable current account deficit,” said Jagannadham Thunuguntla, equity head at SMC Global Securities in New Delhi.
“There is still a long way to go for a rating upgrade.”
The rupee extended gains on the news, ending up at 57.79/80, well above its Tuesday close of 58.39/40 and its record low of 58.98, also on Tuesday.
The benchmark 10-year bond yield recovered from earlier falls, ending down 1 basis point at 7.29 percent. Stock markets were closed when Fitch made its statement….”