India’s stock market analysts are sceptical of rating agency Standard & Poor’s (S&P) downgrade threat to the country. There is no anxiety among traders on Dalal Street, even as S&P on Wednesday revised downwards its outlook on India’s sovereign credit rating, which is now just about investment grade. S&P has retained India’s sovereign rating at BBB-.
S&P’s indication that India could be moved back to the category of junk-rated countries cut no ice with market players and key equity benchmarks, recovered from their day’s low levels. The Bombay Stock Exchange benchmark, Sensex, which fell to 17,019 shortly after the news, closed at 17,151 for the day. Similarly, the broader index, S&P CNX Nifty of the National Stock Exchange, closed at 5,202 after recovering from a low of 5,163 on Wednesday.
“The possibility of S&P downgrading India is as low as the likelihood of nuclear war between the Asian countries,” said Saurabh Mukherjea, head of institutional equities at Mumbai-based Ambit Capital. Deven Choksey, managing director of K R Choksey Shares and Securities said, “S&P’s warning that India can be a junk-rated country is a joke. Informed investors are not paying any heed to rating agencies, which are just trying to be pro-active after their credibility reached its nadir after the 2008 financial crisis and collapse of banks in the US.”
S&P said the negative outlook signals at least a one-in-three likelihood of the downgrade of India’s sovereign ratings within the next 24 months. A downgrade is likely if the country’s economic growth prospects dim, its external position deteriorates, its political climate worsens or fiscal reforms slow, S&P credit analyst Takahira Ogawa said in a statement. Another rating agency, Moody’s has a Baa3 rating on India, while Fitch rates India BBB-. Both are the minimum investment grade ratings.Experts in India are of view that India’s credit rating by S&P, currently below countries like Spain and Ireland, should be upgraded. S&P’s India rating on local currency long-term debt is BBB-, poor compared to the ‘A’ of Spain and BBB+ of Ireland.
While India’s gross external debt is just over three per cent of gross domestic product (GDP), that of both Spain and Ireland are over 50 per cent. Both the countries were worst affected due to the debt crisis, which put all of Europe on the edge before bailout funds were extended by the region’s central bank.
According to Sonal Verma, economist at Nomura, the Indian economy can see some cyclical rebound in the near term. “The debt-to-GDP ratio is likely to remain stable, and fiscal deficit should not worsen substantially. The only risk is the material decline in forex reserves. We believe, there is a low likelihood of a rating downgrade actually occurring,” Verma said.
Stock brokers say if their clients were staying away from stocks as of now, it had more to do with panic selling by foreign institutional investors in the backdrop of an uncertain tax scenario related to the Budget announcements regarding general anti-avoidance tax and the fear of early elections. Nobody wants to catch a falling knife, they said.
Prior to Wednesday’s announcement, S&P had warned in August 2011 that India’s debt situation, among other Asian countries, was being closely monitored. This was a few days after it downgraded the US from AAA to AA+. Then, global stock investors Goldman Sachs and Bank of America Merrill Lynch had calmed Indian jitters.
While Goldman upgraded India to “marketweight” in August after keeping an “underweight” rating for over a year, Merrill had said in a note, “We would advise investors to ignore the inevitable chatter about India’s ‘external vulnerabilities’ as the world becomes a more volatile place. In our view, the Reserve Bank of India has sufficient fire power to fend off contagion as any other emerging market.”
During the Lehman collapse, Merrill had always argued against the fashionable “vulnerability” rankings that simply added up current account deficits and forex reserves to short-term debt ratios. “The reality, surely, is far more complex. Not surprisingly, India (and Indonesia), that topped such lists, weathered the Lehman crisis best (along with China). Why? Because India follows a very different paradigm of domestic demand-led growth than most other export-led Asian economies. The very domestic demand that widens the current account deficit also attracts its financing,” Merill had said.
