Credit rating agency Standard & Poor's (S&P) on Wednesday raised India's sovereign rating outlook to ‘stable' from ‘negative' even as it cautioned that the high rate of overall inflation at nearly 10 per cent could upset the country's ‘stable' macro-economic and interest rate environment.
While pegging India's overall growth rate at 8 per cent for 2011-12 — quite in line with the government's own projection on GDP growth — S&P, in a statement from Singapore, said: “We revised the outlook on the Republic of India to stable from negative.”
Ostensibly, the change in rating outlook reflects the greater faith that S&P now has on the government being able to manage the country's finances by way of taking steps towards fiscal consolidation. The rating agency noted that with the government showing its commitment to reducing the fiscal deficit, it may not downgrade the country's ratings further.
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S&P's concern over the high inflation rate of close to 10 per cent is also shared by economic analysts at home who are expecting the Reserve Bank of India (RBI) to hike interest rates to rein in inflation as part of its credit policy announcement next month.
Curiously, however, while the rating agency has lauded the move to narrow down the gap between income and expenditure, the fact remains that the rise in overall inflation to over 10 per cent for this month as is being expected, would be not only due to food inflation but also on account of restoration of customs duty on crude along with a hike in excise duty on petrol and diesel.
Also, S&P's statement of revising the outlook upwards is in sharp contrast to its stance taken in February last year when it lowered the outlook on India's ratings to negative from positive after the government announced stimulus packages to combat the economic slowdown in the wake of the global financial crisis.
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Investment climate
At present, India's long-term rating is pegged at BBB-, the lowest investment grade. The change in outlook is expected to result in foreign investors reposing greater faith in India's investment climate as also help corporates in raising funds abroad at cheaper rates.
Essentially, sovereign ratings reflect the government's ability to pay back its debts. “This will help Indian firms to raise resources from the international market little bit cheaper. This is due to pick up in the economic growth,” RBI Deputy Governor K. C. Chakrabarty said here.
Alongside, however, S&P cautioned that India's ratings were ‘constrained' by a high fiscal deficit coupled with a high government debt burden owing to increased borrowings. “The consolidated debt of India's central and state government is estimated at 80 per cent of GDP in the current fiscal, while interest payments are likely to consume about 27 per cent of general government revenue,” it said.
On the high inflation rate, S&P's credit analyst Takahira Ogawa said: “In our opinion, the recent high inflation rate could also derail the stable macroeconomic and interest rate environments.”
Banks' rating raised
Along with the sovereign ratings, S&P also revised the outlook on ratings of six public sector undertakings, namely, NTPC, NHPC, PFC, IIFCL, EXIM Bank and Indian Railway Finance Corp. Likewise, it also raised the outlook of 12 banks — Axis Bank, Bank of Baroda, Bank of India, Canara Bank, HDFC Bank, ICICI Bank, IDBI Bank, Indian Overseas Bank, Indian Bank, State Bank of India, Syndicate Bank and Union Bank of India.