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S&P pat to slash loan cost

Mumbai, Jan. 30: International rating agency Standard & Poor’s (S&P) today raised India’s sovereign local currency credit rating to investment grade, opening a window of opportunity for India Inc to cut overseas borrowing costs and making the country an attractive destination for investment.

S&P cited strong economic prospects and external balance sheet, deep capital market and an improving fiscal situation for raising the rating to investment grade from a speculative grade. The outlook on the rating is stable.

Finance minister P. Chidambaram welcomed the move. “I am happy. It is an acknowledgement of India’s improving macroeconomic stability and strength,” he said.

As it lifted the rating to ‘BBB-/A-3’ from ‘BB+/B’, on the eve of the Reserve Bank of India’s credit policy, S&P said economic prospects remain strong and are rising gradually, with GDP trend growth likely to average more than 7.5 per cent in the medium term. It noted that the service sector is dynamic, while the industrial sector is benefiting from gradual deregulation, trade liberalisation and modest improvements in infrastructure.

“The country’s business environment is likely to improve in the coming years, sustaining private investment and economic growth. Economic growth is also benefiting from higher consumption and private investment demand, owing to a growing middle-class and favourable demographics. Investment is also likely to engender employment growth. Gradual reforms and consistent monetary and fiscal policy stances have also sustained macroeconomic stability, leading to strong growth prospects that also attract foreign and non-resident Indian capital to help fund the fiscal deficits,” S&P said.

The rating agency said external balance sheet was also strong due to reserves accumulation and prudent debt management. This has also helped lower the external liquidity risk from its fiscal vulnerability. Moreover, foreign exchange reserves, now more than 16 times short-term debt and five times gross financing requirements, provide a buffer from changes in external and domestic investor confidence. These strengths are likely to continue, despite the current account deficits, on the expectation of strong capital inflows.

S&P observed that continuous monetary and financial reforms since 1991 along with stricter fiscal financing regulations are leading to a more robust capital and government securities markets. While the country’s capital market is deep, the government recently passed an ordinance giving the central bank operational flexibility to set the statutory liquidity ratio, which should further support more market-orientated deficit financing and reinforce fiscal discipline.

S&P, however, warned that ratings on India remain constrained by the weak fiscal profile, particularly the high government debt burden and deficit, which is still one of the worst among all rated sovereigns. The consolidated debt of India’s central and state (general) governments is projected at 85 per cent of 2007 GDP, while interest payments are likely to consume about 30 per cent of general government revenue.

Apart from S&P, the other two international rating agencies — Moody’s Investors Service and Fitch — have upgraded India’s foreign currency debt to investment grade. Analysts said S&P’s upgrade could lead to overseas borrowing costs for Indian corporates and banks coming down.

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