Fitch Ratings has revised India's outlook to negative from stable. Its Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) have been affirmed at 'BBB-' and Short-Term Foreign Currency at 'F3'. India's Country Ceiling is also affirmed at 'BBB-'.

The Outlook revision reflects heightened risks that India's medium- to long-term growth potential will gradually deteriorate if further structural reforms are not hastened, including measures to enhance the effectiveness of the government and create a more positive operational environment for business and private investments. 

The Negative Outlook also reflects India's limited progress on fiscal consolidation and, in particular, on reducing the central government deficit despite improvement in the financial health of state governments.

Fitch, however, notes that India faces an awkward combination of slowing growth and still-elevated inflation. Real GDP grew just 6.5% yoy in FY2011-12 (end-March 2012), down from an 8.4% rise in FY2010-11.

It predicted the Indian economy to grow just 6.5 percent in the fiscal year that ends in March, down from its earlier forecast of 7.5 percent, while it expects wholesale price index inflation to average 7.5 percent.

India’s net external debt is very low and still high foreign exchange reserves of the Reserve Bank of India (RBI) provide a cushion against potential external shocks. 

India's external financial position remains a rating strength, although this is eroding as foreign exchange reserves have fallen (11% since August 2011) and net external indebtedness is rising. Reserves remained at USD286bn as of end-May 2012, equal to six months of current external payments, which still provides the sovereign with an important buffer during periods of elevated global risk aversion. The sovereign is a net external creditor to the tune of 10.2% of GDP at end-FY2011-12, against the 'BBB' median of 3.3% of GDP or the 'BB' median of negative 4.1% of GDP.

Further slowing growth should curb the current account deficit and slow the weakening of the external finances, although oil prices pose a risk. Prolonged and intensified pressure on the currency and/or foreign reserves would be negative for the credit profile.

A significant loosening of fiscal policy, which leads to an increase in the gross general government debt/GDP ratio, would result in a downgrade of India's sovereign ratings. In addition, a material downward revision of Fitch's assessment of the India's medium-term growth potential along with persistent high inflationary pressure would hurt India's sovereign creditworthiness. 

Conversely, an improvement in India's investment climate, which supports greater infrastructure investment and a sharp sustained decline in inflation, would be supportive for India's sovereign ratings. Fiscal consolidation and structural budget reform would also support the ratings.