S&P's rating an affirmation that the Indian economy is on right path

Standard and Poor’s (S&P’s) rating affirmation for India on Thursday comes at a time when most economists expect the economic growth as measured by the gross domestic product (GDP) to grind lower over the next few months with a possible recovery only in the second half of the calendar year 2020.

On Thursday, S&P affirmed India’s sovereign rating of 'BBB-'and maintained a ‘stable’ outlook and said that it believes that structural outperformance remains intact. That said, it did caution against the ‘precarious’ fiscal situation in the backdrop of elevated fiscal deficit and the level of government’s indebtedness.

Analysts see this as a positive and suggest that the rating affirmation by S&P is an indication that the government’s policies should address economy-related issues going ahead.

“The S&P’s affirmation comes in a timely manner when there is uncertainty on the state of the economy. The credit rating agency has rightly highlighted the external strengths of the economy. Tough S&P has flagged issues on fiscal side, it does believe that we are on the right path. Quite clearly the steps taken by the government so far to revive the economy have been recognized. Growth projection remains at 6 per cent for this year and would impact the rating prospect only if there is a significant slippage. As rating agencies do peer level comparison, S&P appears to be more than satisfied of our performance being above normal,” said Madan Sabnavis, chief economist at CARE Ratings.

The recent Budget proposals came in as a disappointment for most analysts in the absence of strong measures to revive economic growth. In this backdrop, they expect the economy to muddle through for a few more months before gaining momentum in the second half of financial year 2020-21 (H2-FY21).

“Overall, we expect gross domestic product (GDP) growth to slide further to 4.3 per cent y-o-y in Q4 (from 4.5 per cent in Q3), before staging a weak recovery to 4.5 per cent in Q1-2020 (lowered from 4.7 per cent earlier). India is not directly exposed to the coronavirus outbreak, but we are concerned that there will likely be indirect spillovers due to weaker global demand. For 2020, we expect GDP growth to remain below trend at 5.4 per cent in 2020, only marginally higher than 4.9 per cent in 2019,” wrote Sonal Varma, managing director and chief India economist at Nomura in a co-authored report with Aurodeep Nandi.

The recent economic print in terms of the index of industrial production (IIP) numbers and consumer price inflation (CPI) also disappointed. As a result, most analysts now expect the Reserve Bank of India (RBI) to cut rates only in its June 2020 policy. Analysts at BofA Securities, for instance, expect the CPI inflation to peak off to 7.3 per cent in February with onion prices dropping to Rs 44/kg from Rs 64/kg in January.

“This poses an upside risk to our 4.2 per cent March 2020 inflation forecast. Core inflation, however, remains benign at 3.5 per cent, reflecting subdued demand. With CPI inflation temporarily above its 2 – 6 per cent mandate, the RBI MPC will likely continue its dovish pause on April 3. As inflation peaks off, the MPC will likely cut in June,” wrote Indranil Sen Gupta, their India economist in a recent co-authored report with Aastha Gudwani.

For the markets, S&P’s move comes as a surprise and will be a sentimentally positive at a time when the other macro data – inflation, growth, CPI – have been worrisome, believes G Chokkalingam, founder and managing director at Equinomics Research.