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India's local currency rating under threat: Fitch

International ratings agency Fitch Ratings said on Monday India's local currency rating looks to be under threat due to the government's bloated fiscal deficit.

"The domestic credit picture is poor. The local currency rating looks to be under threat," Brian Coulton, senior director of Asian sovereign ratings, told a client seminar in Hong Kong.

India has set a fiscal deficit target of 5.3 per cent of gross domestic product for the financial year ending March 2003, down from 5.7 per cent last year. But it has consistently overshot its deficit target in previous years.

The International Monetary Fund last week said India's yawning fiscal deficit is a big short-term risk and New Delhi needs to aggressively pursue reforms to overcome the problem.

Fitch, which last revised India's rating in November last year, has a speculative grade BB-plus rating on local debt. The agency said in September it planned to review India's rating in another two months. Fitch rates India's local currency at BB-plus and foreign currency at BB with a stable outlook.

Fellow ratings agency Standard & Poor's cut its long-term local currency credit rating on India to BB-plus from BBB-minus in September, citing a rising debt burden and vulnerable public finances.

The S&P downgrade came on the heels of concerted opposition within India's multi-party coalition to a Rs 120-billion privatisation programme that would have helped to bridge the balloning fiscal deficit.

The struggling privatisation programme is also a concern for Fitch, which said the government lacked the appetite to deal with the deficit.

"There's no political will to tackle the problem. You have weak state banks and there has been stop-start privatisation," Coulton said.

Despite the underlying economic risks, India's foreign exchange reserves have risen to a record $62.066 billion this year, boosted by stronger exports and remittances from overseas Indians as the US-dollar fell.

Rival agency, Moody's Investors Service, bucked the negative trend last month by placing India's ratings on review for a possible upgrade, based primarily on a substantial strengthening of the country's external financial situation.

The foreign currency issuer rating for the Republic of India -- the proxy for the rating that would likely be assigned were the government to issue a foreign currency -denominated bond in the international capital markets -- has also been placed on review for possible upgrade.

At present, however, the government has no such bonds outstanding nor are there any rated government-guaranteed eurobonds outstanding, Moody's said. But the Ba2 domestic currency bond rating of the government is not on review and the outlook on that rating remains negative due to continuing stress in India's internal finances and last year's broad-based reduction in import tariffs.

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