Expecting a slew of reforms in the upcoming Union Budget, global rating agency Fitch on Wednesday said any deviation from fiscal consolidation path could be a negative for its investment grade rating for India.
Fitch reaffirnmed its relatively high risk investment grade BBB- rating, with a "stable" outlook.
"Sustained fiscal consolidation and fiscal reforms that lead to a sharp decline in the ratio of gross general government debt to GDP is a positive for the country," Fitch said in a report adding "many small reforms together are likely to have a significant impact on GDP growth."
The agency also said deviation from the fiscal consolidation path that results in continuation of large general government budget deficits could be negative.
It further said the government continues to gradually roll out a large number of structural reforms and many reform announcements are likely in the budget.
The agency had affirmed its 'BBB-'/Stable rating on the country last year, reflecting our perception that the country has strengthened its buffers against potential volatility in investor risk appetite. It would come out with its next credit rating review for the country in April.
It said the country's ratings reflect a balance between high foreign exchange reserves (over $ 330 billion) and real GDP growth (7.5 per cent in third quarter of the current fiscal), and weak fiscal balances and low governance standards.
However, Fitch believes many persistent obstacles to higher growth remain and pointed to inflation, which though came down substantially, still has the potential to resurface but pointed out that the new monetary policy framework, under which the focus in retail inflation, resulting from discussions between the government and the central bank could contribute to a credible low inflation environment.
"Establishing a credible low inflation environment, for example through the use of a transparent and clear monetary policy framework and tackling structural impediments to lower food price inflation is positive," the rating agency said.
The report said loose macro policy setting that would cause inflationary pressures to persist and/or the current account to widen, leading to external funding stress could have impact on the rating of the country.