General Awareness

April 04, 2017 @ 01:15 PM

General Awareness Topic : S&P Upgrades India's Credit Outlook

 Published : Friday, 10 October, 2014 12:32 PM  
 
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S&P Upgrades India’s Credit Outlook
 
On September 26, 2014, global rating agency Standard & Poor’s (S&P) upgraded its outlook on India’s credit from ‘negative’ to ‘stable’ while still retaining the credit rating at ‘BBB Minus’. The sovereign rating assesses the capacity of a government to pay its debt. S&P reviews its sovereign rating every two years.
 
Earlier in April 2012, the rating agency had cut India’s ‘BBB Minus’ rating to ‘negative’, leaving it on the verge of a ‘junk’ rating, which symbolized depleting investor confidence due to a series of graft allegations and a perception of policy paralysis associated with the then Congress-led United Progressive Alliance (UPA) government.
 
The revised S&P’s outlook is now at par with that of two other rating agencies – Moody’s Investors Service and Fitch Ratings. All three global rating agencies have the lowest investment grade rating for India, with a stable outlook. 
 
The S&P gave two reasons for the change in outlook. One, a stronger political mandate improves the government’s ability to implement reforms, spur growth and improve its fiscal performance.Second, the country’s external account has improved with the government pushing measures to narrow its current account deficit.
 
In fact, the April 2012 rating degrade forced the UPA government’s finance minister P Chidambaram to push drastic measures such as imposing curbs on gold imports and backing the Reserve Bank of India’s (RBI) further tightening of monetary policy to rein in inflation. 
 
Despite the revision in the outlook, the S&P has cautioned ‘low wealth level’ and ‘weak public finances’ as key constraints. It further warned that stalling the reforms agenda over the next two years could result in lowering of ratings. 
 
That the upgraded outlook has come four months after the NarendraModi government took over is a shot in the arm of the current dispensation. Investor confidence and business sentiment has seen an upsurge after the landslide victory of the BJP-led National Democratic Alliance (NDA) government in May.
 
Foreign portfolio inflows increased during the period and the gross domestic product (GDP) growth rose to a nine-quarter high of 5.7% in the April-June period, signaling a recovery after two years in which it slumped below 5%.  
 
In fact, the S&P has said, “the current government will remedy, to varying degrees, the growth impediments – policy paralysis, energy supply bottlenecks, and administrative obstacles… We project real per capita GDP growth to reach 5% by next year, and per capita GDP to surpass USD 2,000 by 2017.”
 
With that said, the onus now shifts on Modi government to transform the promises to real action. While it is true that Modi has brought a sense of optimism and urgency in pushing economic reforms, the government in itself has not announced any big-ticket reform measures. 
 
The only exceptions are enhancing the foreign direct investment limits in the defence and insurance sectors. In fact, Modi detractors maintain that the current bout of macroeconomic stability, which Indian economy is currently enjoying, is the result of the combined efforts of the RBI and Chidambaram such as tight monetary policies and imposing curbs on gold imports. 
 
In order to return to an era of high growth and investment, the Modi government, especially with the kind of political mandate they have, must push next level of reforms to remove any element of uncertainty in the economy. 
 
Through decisive measures, it can set off a cycle of investment, consumption and growth. Next few months will give a good hint on the government’s approach towards bigger macro-economic policymaking and disinvestment of public sector companies such as Coal India Limited.   
But, the moot question remains: Post-2008 economic crisis and the downfall of the Lehman brothers, can we trust rating agencies? Then, all big three rating agencies failed in warning investors of the dangers of investing in many of the mortgage-based securities, which was at the epicenter of the financial crisis. 
 
The agencies say they have improved their due diligence and made adequate adjustments. Despite the debacle, assessment from rating agencies matters to large global fund managers and investors with most of them basing their decisions on the guidance issued by these agencies. Credit ratings manifests itself in exchange rates and indirectly impacts overall economic well-being.
 
The Indian currency weakened in the past week due to the broader dollar rally, along with the Supreme Court cancelling coal block allocation and selling spree in Indian equity markets. The rating upgrade immediately helped rupee gain strength against the dollar rally in the international market when other Asian currencies were under huge pressure. 
 
S&P’s move has bolstered positive sentiment in the domestic equity markets ending recent losses by all benchmark indexes. The Confederation of Indian Industries too welcomed the S&P move saying it would improve investor confidence and enhance banks and companies’ access to international funds as borrowing rates come down. 
 
The S&P also revised the outlook on most of the banks to stable following the revision on the sovereign outlook. A rating upgrade will provide relief to banks as their ratings are linked to sovereign rating of the country. They will be in a better position to bargain for lower borrowing costs in international markets to fund big-ticket projects in India. 
 
 
 
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