The strain of COVID-19 is showing up on the Indian economy, and Fitch joins Moody's in downgrading the rating. Image Credit: ANI

Mumbai: India's credit score moved a step closer to junk after Fitch Ratings Ltd. cut the outlook to negative, citing weak economic growth prospects and rising public debt.

Fitch said it expects economic activity to contract by 5 per cent in the fiscal year to March as a result of measures to contain COVID-19. General government debt is seen jumping to 84.5 per cent of gross domestic product during the period, far higher than the median of 42.2 per cent for similar-rated sovereigns in 2019, it said in a statement.

The long-term foreign issuer rating was affirmed at BBB-, the lowest investment grade score.

"Fiscal metrics have deteriorated significantly, notwithstanding the government's expenditure restraint, due to the impact of the severe growth slowdown on revenue, the fiscal deficit and public-sector debt ratios," Fitch said.

Second successive blow

Asia's third-largest economy is heading for its first contraction in more than four decades this year and bracing for a fiscal deficit blowout as the coronavirus pandemic spreads. Fitch's action follows Moody's downgrading the nation's rating to the lowest investment score earlier this month, with the outlook kept on negative watch.

"The medium-term fiscal outlook is of particular importance from a rating perspective," Fitch said. That "is subject to great uncertainty and will depend on the level of gross domestic product growth and the government's policy intentions."

India's rupee, stocks and sovereign bonds were little changed after Fitch's move, which was largely expected by markets after the downgrade by Moody's. 

S&P Global Ratings last week surprised market participants by retaining the lowest investment grade of BBB- for India, with a stable outlook. It sees the fiscal position stabilizing and recovering in 2021.

"It remains to be seen whether India can return to sustained growth rates of 6-7 per cent," Fitch said. Any rebound depends on the "lasting impact of the pandemic, particularly in the financial sector."