Global brokerage Bank of America Merrill Lynch today said "worst is over" for India and rating agencies are likely to upgrade their outlook for the country sooner rather than later.
"With Moody's downgrading their Brazil outlook last night, key emerging market peers are seeing downgrades," BofA-ML said in a research note, but added that "we expect rating agencies to upgrade their outlook for India".
The global financial services major further noted that "we thought the S&P downgrade of the BBB- outlook to negative from stable in April 2012 unwarranted."
BBB- is the lowest investment grade and a downgrade would mean pushing the country's sovereign rating to junk status, making overseas borrowings by corporates costlier.
The report noted that there are three "compelling" reasons for an upgrade in outlook -- growth is bottoming; inflationary pressures are softening and risks from twin deficits have proven to be overdone.
In addition, it said, RBI Governor Raghuram Rajan is recouping forex reserves to stabilise rupee in Rs 58-62/USD.
The report also said that India's "potential" growth rate is about 7.5 per cent and it is likely to emerge as the second-largest emerging market after China by 2019.
"We grow more confident of our call that the slowdown in growth has been largely driven by the global downcycle rather than domestic structural issues," it said, adding that growth should rebound to 7.5 per cent by 2018, especially if the Modi government steps up infrastructure investment".
BofA ML outlined four cyclical factors like -- US recovery, stabilisation of Brent crude to around USD 100/bbl, the rupee at around Rs 60/USD and revival in government's reform activity -- that would drive growth back to 7.5 per cent by FY'18.
On inflation, it said that is largely "imported" rather than homegrown. "We expect CPI inflation to come off to 6 per cent in 2016 in line with the RBI's forecast."
On RBI rates, the report said: "We believe that the RBI can cut rates even if the Fed hikes from September 2015, with Governor Rajan recouping FX reserves. We see it cutting policy rates by 75-100 bp starting in February, even if Fed Chair Janet Yellen hikes from September 2015.
