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Just a few hours before he landed in New York, Prime Minister Narendra Modi got a gift of sorts from rating agency Standard & Poor's (S&P) which will help him showcase India's improved finances and growth story to global investors.
On Friday, the agency raised the outlook on India's sovereign rating from negative to stable on the grounds that the National Democratic Alliance (NDA) government offered a suitable environment for reforms. "Our outlook revision (is based on) our view that India's improved political setting offers a conducive environment for reforms, which could boost growth prospects and improve fiscal management," S&P said in a statement from Singapore.
In April 2012, the rating agency had revised its outlook from stable to negative. On Friday, it scaled up the outlook on India's rating, though the rating remained BBB-, the lowest in the investment grade. Earlier, the finance ministry had made a case for a rating upgrade; now, it has said an upgrade would follow, as the government pursued reforms.
With this, S&P's outlook is in sync with that of two other rating agencies - Moody's Investors Service and Fitch Ratings; all three agencies have the lowest investment grade rating for India, with a stable outlook. The outlook suggests there are fewer chances of a rating downgrade. For India, a downgrade would mean a junk rating. The sovereign rating assesses the capacity of a government to pay its debt.
"We will keep surprising you with lots of reforms," Finance Secretary Arvind Mayaram told reporters.
One of the parameters on which S&P based its ratings and outlook was fiscal consolidation. State Bank of India Chairperson Arundhati Bhattacharya said, "We believe the country is well on a path of faster-than-anticipated fiscal consolidation and, going forward, it could be a positive surprise."
In its statement, S&P said, "The stable outlook for the next 24 months reflects our view that the new government has both the willingness and capacity to implement the reforms necessary to restore some of India's lost growth potential, consolidate its fiscal accounts, and permit the Reserve Bank of India to carry out an effective monetary policy."
S&P's move bolstered sentiment in the markets. Equity markets erased initial losses, ending a three-day losing streak. The BSE Sensex rose 158 points, or 0.6 per cent, to close at 26,626, while the National Stock Exchange Nifty gained 0.7 per cent to end at 7,986. While the 10-year benchmark bond yield ended five basis points lower at 8.44 per cent, the rupee ended a four-day declining trend to rise by 19 paise, closing at 61.15/dollar.
Standard Chartered said S&P's decision was likely to be a near-term positive for the rupee. "The rupee has weakened in the past week, given the broader dollar rally, along with the Supreme Court judgment on coal block allocation and weakness in domestic equities. Against such a backdrop, this decision is likely to provide some support to the rupee," it said.
Industry was happy, too. The Confederation of Indian Industries said the move would improve investor confidence and enhance companies' access to international funds.
Investors allot funds to economies on various parameters, including rating agencies' scores.
Sanjiv Bhasin, country manager, DBS, said, "This is a very positive development from an investment point of view and for those watching India from outside. This signals confidence in India and, as a result, we might see more investments coming into India. Inflows had already started trickling in the last four months and this upgrade will help the trend continue."
Jayant Manglik, president (retail distribution), Religare Securities, said S&P's move showed increased confidence by an independent agency. He added this would positively affect India's business image and lead to increased fund inflows.
The Indian Banks' Association said the move would aid lenders, in terms of cost of funds, by softening rates at which they borrowed globally. "S&P's positive outlook will certainly help ensure the cost of funds is comparatively softened and the investors' world will look at opportunities positively," said the lobby group's chief executive, M V Tanksale. S&P, however, highlighted there were chances of Parliament stalling some reforms. "Though the paralysing effect of legislative gridlock can blunt government effectiveness, our outlook revision indicates we believe the current government's strong mandate will enable it to implement many of its administrative, fiscal, and economic reforms," the statement said. The agency also pinned hopes of an improved fiscal position on the proposed goods and services tax, which would need the approval of Parliament and state legislatures.
India's rating might be upgraded if per capita real income returns to a trend growth rate of 5.5 per cent and fiscal, external and inflation metrics improve. However, it could be downgraded if the government's structural reform agenda stalled and led to stagnating economic growth and worsening fiscal and debt ratios, S&P cautioned. The finance ministry is confident of a rating upgrade. Mayaram told reporters S&P had acknowledged the government's commitment to bring the country back on the growth path.
While S&P said India's external position was its key credit strength, it raised concern over the country's low wealth level and weak public finances.
