Rating agency Standard & Poor's Ratings Services has revised its outlook on India to stable from negative. At the same time, it has affirmed the 'BBB-' long-term and 'A-3' short-term unsolicited sovereign credit ratings on India.
“Our outlook revision reflects our view that India's improved political setting offers a conducive environment for reforms, which could boost growth prospects and improve fiscal management,” S&P said in a statement.
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.
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 per cent 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 per cent 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.
Current account deficit
India's current account deficit has improved in recent years after restrictions on gold imports and slower domestic investment demand.
At the same time, the central bank has rebuilt its foreign currency reserves to cover about 5.5 months of current account payments.
"Although, we expect the current account deficit to widen from its current low of 1.8 per cent 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,'' it said.
What Finance Secretary says
Commeting on the latest move, Finance Secretary Arvind Mayaram said:"We are satisfied that the credit rating agency has acknowledged the steps that the Government of India has taken to improve the economy and especially to bring the investment cycle back and therefore the growth cycle back."
He further said that he was not disappointed because "we believe rating agencies have their own methodologies that they use and sometimes there might be divergence in the manner in which we access the economy."
Rejuvenates Sensex
The S&P upgrade on Friday surprised the market, which was struggling to find direction until the announcement was made.
The S&P BSE Sensex and the NSE’s Nifty rose steeply as the news broke out at around 2.30 pm.
Jayant Manglik, President-Retail Distribution, Religare Securities, said investor confidence will move up a notch along with the rating and this essentially means that money waiting on the sidelines will now come into India.
However, foreign institutional investors, maintaining their selling spree for the fourth day in a row, offloaded shares worth ₹1,133.64 crore. Domestic funds remained net buyers to the tune of ₹1,335.3 crore.
Vinod Nair, Head-Fundamental Research, Geojit BNP Paribas Financial Services, said, “The S&P news in the last hour of market close… is very positive. We continue to believe the India story to improve over the next six-nine months.” These are good times to buy equities, he added.