Standard and Poor's (S&P) on Friday raised India's outlook from BBB-negative to `stable' implying that the government's efforts in taming inflation, current account deficit and fiscal deficit were in the right direction.
Bankers and financial institutions welcomed the move though most said the upgrade was expected five months ago when the new government took charge. "Theoretically, the next downgrade would have been `junk', but now that S&P has moved India upwards, pricing of Indian bonds will get better in the overseas markets," said Keki Mistry, vice chairman and chief executive officer at HDFC.
S&P had downgraded India to 'negative' two years ago under the earlier UPA government that was hit by a series of corporate scams involving mining and telecom spectrum. This had led to a massive drop in investor-sentiments and hurt the overall economy.
The 'stable' rating is a reflection of India's sound external position, supported by robust capital inflows and a benign current account deficit," said Arundhati Roy, chairman of State Bank of India, the country's largest government bank.
In a statement issued, she said: "India is well on a path of faster-than-anticipated fiscal consolidation and it could be a positive surprise going forward."
Foreign institutional investors, though have been net sellers of equities to the tune of Rs 3,500 crore in the last four days, were likely to resume buying in the coming week, market dealers said.
"S&P's upgrade is an observation of an independent agency that has certified India to be on the path of growth. Facts that GDP appeared to be on track, target revenues seem achievable and the Supreme Court's fine on coal companies all point towards fiscal consolidation," said UR Bhat, managing director at Dalton Capital Advisors (India).
The risk on the currency has become lower by the rating due to comfortable forex reserves with the Reserve Bank of India, said Mistry.
"India's external position is a key credit strength. The country has relatively little external debt and a much improved external liquidity position. We project that by the fiscal year ending March 31, 2015, external debt net of external assets will be 6% of current account receipts. Central bank
reserves well exceed public sector external debt, reflecting the public sector's ability to finance practically all of its borrowing requirement domestically. On a broader definition, India's net external liabilities are a low 49% of CARs based on our projections at the end of the current fiscal year in March 2015, and nearly half of gross external liabilities consist of inbound foreign direct investments," said S&P in a statement.
It further said, India's current account deficit has improved in recent years following restrictions on gold imports and slower domestic investment demand. At the same time, the central bank rebuilt its foreign currency reserves to cover about 5.5 months of current account payments. Although we expect the current account deficit to widen from its current low of 1.8% of GDP (as of March 2014) as investment picks up, gross external financing needs are likely to remain at or below the sum of CARs plus usable reserves in the next two to three years.
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