India's rating is lowered to negative by firm

Fitch Ratings lowered India's domestic rating outlook to negative from stable on Tuesday, citing the central government's worsening fiscal position.

It maintained the country's BBB-minus rating for both its local currency rating and its foreign currency rating.

The outlook on the country's foreign currency rating is stable.

Fitch said higher subsidies, interest payments and public wages, along with bonds issued to oil and fertilizer companies, could push up the underlying federal fiscal deficit in 2008/09 to 6.5 percent of gross domestic product or even higher.

The government is trying to contain the fiscal deficit within 2.5 percent of GDP in 2008/09, below last fiscal year's 2.8 percent. The fiscal year runs from April to March.

James McCormack, Fitch's head of Asia sovereign ratings, said in a statement that the change in the outlook was also partly due to a notable increase in government debt issuance to finance subsidies not reflected in the budget.

"Future actions with respect to India's local currency rating will depend largely on whether the FY09 fiscal slippage is reversed, which would allow for a resumption of the decline in India's high government debt ratios," McCormack said.

Fitch expected the trade deficit to widen further to 8.2 percent of GDP in 2008/09 from 7.7 percent of GDP in 2007/08, driven by high oil prices.

It projects the current account deficit to be broadly unchanged around 1.5 percent of GDP.

"Based on the change in global investor risk appetite and the less certain short-term macroeconomic outlook for India, Fitch believes capital inflows will decline sharply in FY09, but they are expected to be sufficient to finance the current account shortfall," it said.