India makes the investment grade after 15 years

HONG KONG: Fifteen years after courting external bankruptcy, India has returned to the global list of respectable investment destinations. On Tuesday, rating agency Standard & Poor’s declared Indian sovereign debt securities investment-grade, raising the rating to BBB- from BB+. BBB- is the lowest rating of investment-grade paper, the highest being AAA.

The BBB- rating puts India ahead of countries such as Indonesia (BB-) and Sri Lanka (B+); but the country is still far behind China and Malaysia (A). An investment-grade rating will nevertheless enable companies to raise debt abroad more cheaply at a time when interest rates back home are headed higher due to worries over inflation. The Reserve Bank of India is widely expected to push up interest rates today during its quarterly review of monetary policy.

The rating upgrade comes as a thumbs-up for the management of India’s political economy. S&P is telling the world that the economy is doing fine, and it can withstand all shocks.

Addressing a phone-in press conference from Singapore, S&P’s credit analyst, Ping Chew, explained the rationale for the upgrade. “India’s economic prospects remain strong and are rising gradually, with GDP growth likely to average more than 7.5 per cent in the medium term.”

Chew said gradual reforms and consistent monetary and fiscal policy stances have also sustained India’s macroeconomic stability, which has led to strong growth prospects and attracted foreign and non-resident Indian capital. “India’s strong institutions have also provided for relative stability in policy, politics, and business environments against volatility usually associated with lower income levels,” he said.

The timing of the upgrade reflects confidence that “fiscal consolidation commitments across all levels of governments look to be entrenched.”

In other words, both the central and state governments are serious about meeting their fiscal and revenue targets. “Only very recently have we seen more evidence of this,” Chew said.

In more practical terms, a sovereign rating determines the terms on which a country — and corporate entities — can borrow in the international market. Higher the rating, lower the rate at which the country and its corporations can borrow. This should lower Indian companies’ interest cost on overseas borrowings and increasing their profitability.

The sovereign rating will also offer greater comfort to international investors.

Finance Minister P Chidambaram noted that the upgrade was an “acknowledgement of India’s macroeconomic stability and strength”. Rajeev Malik, JPMorgan Chase Bank’s vice-president and senior economist, said, “We concur with S&P’s assessment.” But Malik said the move had come “slightly sooner than our expectation: we expected the rating agency to move after the announcement of the Budget in February.”