Rating agency Standard & Poors has reversed its opinion about the Indian economy and upgraded the rating outlook to stable from negative while maintaining the credit rating at BBB-.

 

This is a major change from its position last year when it said India faces one in three chances of a downgrade.

 

In a huge sentiment boost for India, S&P on Friday revised India's credit outlook up to 'stable' from 'negative'. While the agency maintained India's rating at BBB-, the revision in outlook is good news for the Indian economy as raising debt will become cheaper for Indian companies and it will also encourage foreign institutional investors.

The move has boosted bank shares as it now makes it easier for lenders to raise debt from international market. "Our outlook revision reflects our view that India's improved political setting offers a conducive environment for reforms, which could boost growth prospects improve fiscal management. The ratings on India reflect the country's strong external profile, combined with its democratic institutions and free press, both of which underpin policy stability and predictability. These strengths are balanced against the vulnerabilities stemming from the country's low per capita income and weak public finances," S&P said.

The other positive of the rating is that there is lesser chance of exodus of foreign investors when the US starts tightening its monetary policy next year.

The rating agency said that India's key strength was its well-entrenched democratic political system. That, along with the country's mature and stable institutions (including free press) and system of checks and balances, has afforded India a long period of stability. "Although the paralyzing effect of legislative gridlock can blunt government effectiveness, our outlook revision indicates that we believe the current government's strong mandate will enable it to implement many of its administrative, fiscal, and economic reforms," said the rating agency.

"Although we expect the current account deficit to widen from its current low of 1.8% of GDP (as of March 2014) as investment picks up, gross external financing needs are likely to remain at or below the sum of CARs plus usable reserves in the next two to three years," the rating agency said.

The rating agency also appears to be bullish on the Modi government. "We expect the new administration to adhere to its stated fiscal consolidation program, even though we acknowledge that planned revenues may not fully materialize and subsidy cuts may be delayed. We expect improved fiscal performance in the medium term primarily from revenue-side improvements brought about by the planned introduction of a national goods and services tax (GST) and administrative efforts to expand the tax base. We project net general government debt to decline to below 60% of GDP by the year ending March 2018, and with it, general government interest rate expense to just under 20% of revenues. A faster pace of deficit and debt reduction is unlikely in our view. Hence, we believe fiscal and debt metrics are set to remain key rating constraints for some time," it said.

According to S& P India's external position is a key credit strength. The country has relatively little external debt and a much improved external liquidity position. "We project that, at the fiscal year end of March 31, 2015, external debt net of external assets will be 6% of current account receipts (CARs). Central bank reserves well exceed public sector external debt, reflecting the public sector's ability to finance practically all of its borrowing requirement domestically. On a broader definition, India's net external liabilities are a low 49% of CARs based on our projections at the end of the current fiscal year in March 2015, and nearly half of gross external liabilities consist of inbound foreign direct investments.," the statement said.

The agency noted that there has been significant improvement in the Indian economy since the rupee came under pressure last year. "India's current account has improved in recent years after restrictions on gold imports and slower domestic investment demand. At the same time, the central bank rebuilt its foreign currency reserves to cover about 5.5 months of current account payments," said S&P.

More than 90% of general government debt is denominated in rupees. This debt stock is primarily held by domestic banks and other financial institutions, often for regulatory requirements. The Indian government's foreign currency debt comes from official lenders. Thus we see little foreign exchange or roll-over risk for the government. Although real interest rates have been consistently negative, the interest cost on government debt amounts to almost a quarter of government revenues. Fiscal flexibility is further constrained by the general shortage of infrastructure and basic government services. (Times of India)